Edgar Filing: CAPITAL ONE FINANCIAL CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 1-13300

CAPITAL ONE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		54-1719854
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1680 Capital One Drive, McLean, Virginia		22102
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (703) 720-1000

(Former name, former address and former fiscal year, if changed since last report)

(Not applicable)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of July 31, 2014, there were 561,318,773 shares of the registrant’s Common Stock, par value $.01 per share, outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Financial Statements	71
	Consolidated Statements of Income	72
	Consolidated Statements of Comprehensive Income	73
	Consolidated Balance Sheets	74
	Consolidated Statements of Changes in Stockholders’ Equity	75
	Consolidated Statements of Cash Flows	76
	Notes to Consolidated Financial Statements	77
	Note 1—Summary of Significant Accounting Policies	77
	Note 2—Discontinued Operations	80
	Note 3—Investment Securities	80
	Note 4—Loans	88
	Note 5—Allowance for Loan and Lease Losses	111
	Note 6—Variable Interest Entities and Securitizations	114
	Note 7—Goodwill and Other Intangible Assets	119
	Note 8—Deposits and Borrowings	120
	Note 9—Derivative Instruments and Hedging Activities	122
	Note 10—Accumulated Other Comprehensive Income	129
	Note 11—Earnings Per Common Share	132
	Note 12—Fair Value of Financial Instruments	133
	Note 13—Business Segments	147
	Note 14—Commitments, Contingencies, Guarantees, and Others	150
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	1
	Summary of Selected Financial Data	2
	Introduction	5
	Executive Summary and Business Outlook	7
	Critical Accounting Policies and Estimates	10
	Accounting Changes and Developments	11
	Consolidated Results of Operations	11
	Business Segment Financial Performance	18
	Consolidated Balance Sheets Analysis	31
	Off-Balance Sheet Arrangements and Variable Interest Entities	35
	Capital Management	35
	Risk Management	40
	Credit Risk Profile	41
	Liquidity Risk Profile	53
	Market Risk Profile	57
	Supervision and Regulation	59
	Forward-Looking Statements	60
	Supplemental Tables	62
	Glossary and Acronyms	64
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	162
Item 4.	Controls and Procedures	162


		i		Capital One Financial Corporation (COF)


PART II—OTHER INFORMATION		163
Item 1.	Legal Proceedings	163
Item 1A.	Risk Factors	163
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	163
Item 3.	Defaults upon Senior Securities	163
Item 4.	Mine Safety Disclosures	163
Item 5.	Other Information	163
Item 6.	Exhibits	163

SIGNATURES		164
EXHIBIT INDEX		165


		ii		Capital One Financial Corporation (COF)

INDEX OF MD&A TABLES AND SUPPLEMENTAL TABLES


Table	Description	Page
	MD&A Tables:
1	Consolidated Financial Highlights (Unaudited)	3
2	Business Segment Results	6
3	Average Balances, Net Interest Income and Net Interest Yield	12
4	Rate/Volume Analysis of Net Interest Income	14
5	Non-Interest Income	15
6	Non-Interest Expense	16
7	Credit Card Business Results	19
7.1	Domestic Card Business Results	21
7.2	International Card Business Results	23
8	Consumer Banking Business Results	25
9	Commercial Banking Business Results	28
10	Other Results	30
11	Investment Securities	32
12	Non-Agency Investment Securities Credit Ratings	33
13	Net Loans Held for Investment	33
14	Changes in Representation and Warranty Reserve	35
15	Capital Ratios	37
16	Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III Standardized Approach	39
17	Loan Portfolio Composition	42
18	30+ Day Delinquencies	44
19	Aging and Geography of 30+ Day Delinquent Loans	45
20	90+ Day Delinquent Loans Accruing Interest	45
21	Nonperforming Loans and Other Nonperforming Assets	46
22	Net Charge-Offs	47
23	Loan Modifications and Restructurings	49
24	Allowance for Loan and Lease Losses Activity	51
25	Allocation of the Allowance for Loan and Lease Losses	52
26	Liquidity Reserves	53
27	Deposit Composition and Average Deposit Rates	54
28	Short-Term Borrowings	55
29	Contractual Maturity Profile of Outstanding Debt	56
30	Senior Unsecured Debt Credit Ratings	57
31	Interest Rate Sensitivity Analysis	59

	Supplemental Tables:
A	Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures	62


		iii		Capital One Financial Corporation (COF)

PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This discussion contains forward-looking statements that are based upon management’s current expectations and are subject to significant uncertainties and changes in circumstances. Please review “Forward-Looking Statements” for more information on the forward-looking statements in this Quarterly Report on Form 10-Q (“this Report”). Our actual results may differ materially from those included in these forward-looking statements due to a variety of factors including, but not limited to, those described in “Part II—Item 1A. Risk Factors” in this Report and in “Part I—Item 1A. Risk Factors” in our 2013 Annual Report on Form 10-K (“2013 Form 10-K”). Unless otherwise specified, references to notes to our consolidated financial statements refer to the notes to our unaudited consolidated financial statements as of June 30, 2014 included in this Report.

Management monitors a variety of key indicators to evaluate our business results and financial condition. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing on changes from year to year in certain key measures used by management to evaluate performance, such as profitability, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited consolidated financial statements and related notes in this Report and the more detailed information contained in our 2013 Form 10-K.


		1		Capital One Financial Corporation (COF)

SUMMARY OF SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data from our results of operations for the second quarter and first six months of 2014 and 2013, and selected comparative balance sheet data as of June 30, 2014 and December 31, 2013. We also provide selected key metrics we use in evaluating our performance. Certain prior period amounts have been recast to conform to the current period presentation. The comparability of our results of operations between reported periods is impacted by the following transactions completed in 2013:

•

On November 1, 2013, we completed the acquisition of Beech Street Capital, a privately-held, national originator and servicer of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal Housing Administration (“FHA”) multifamily commercial real estate loans.

•

On September 6, 2013, we completed the sale of the Best Buy private label and co-branded credit card portfolio to Citibank, N.A (“Portfolio Sale”). Pursuant to the agreement we received $6.4 billion for the net portfolio assets.

In 2012, we completed the acquisitions of (i) substantially all of the assets and assumed liabilities of HSBC’s credit card and private-label credit card business in the United States (other than the HSBC Bank USA, National Association consumer credit card program and certain other retained assets and liabilities) (the “2012 U.S. card acquisition”); and (ii) substantially all of the ING Direct business in the United States (“ING Direct”) from ING Groep N.V., ING Bank N.V., ING Direct N.V. and ING Direct Bancorp (the “ING Direct acquisition”).

We use the term “Acquired Loans” to refer to a limited portion of the credit card loans acquired in the 2012 U.S. card acquisition and the substantial majority of consumer and commercial loans acquired in the ING Direct and Chevy Chase Bank, F.S.B. (“CCB”) acquisitions, which were recorded at fair value at acquisition and subsequently accounted for based on expected cash flows to be collected (under the accounting standard formerly known as “Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” commonly referred to as “SOP 03-3”). The difference between the fair value at acquisition and expected cash flows represents the accretable yield, which is recognized in interest income over the life of the loans. The difference between the contractual payments on the loans and expected cash flows represents the nonaccretable difference or the amount of principal and interest not considered collectible, which incorporates future expected credit losses over the life of the loans. Decreases in expected cash flows resulting from further credit deterioration will generally result in an impairment charge recognized in our provision for credit losses and an increase in the allowance for loan and lease losses. Charge-offs are not recorded until the expected credit losses within the nonaccretable difference is depleted. In addition, Acquired Loans are not initially classified as delinquent or nonperforming as we expect to collect our net investment in these loans and the nonaccretable difference is expected to absorb the majority of the losses associated with these loans. The accounting and classification of these loans may significantly alter some of our reported credit quality metrics. We therefore supplement certain reported credit quality metrics with metrics adjusted to exclude the impact of these Acquired Loans. The period-end carrying value of Acquired Loans accounted for subsequent to acquisition based on expected cash flows to be collected was $26.0 billion and $28.6 billion as of June 30, 2014 and December 31, 2013, respectively. For additional information, see “MD&A—Credit Risk Profile” and “Note 4—Loans.”


		2		Capital One Financial Corporation (COF)

Table 1: Consolidated Financial Highlights (Unaudited)⁽¹⁾


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in millions, except per share data and as noted)	2014		2013		Change			2014		2013		Change
Income statement
Net interest income	$	4,315	$	4,553		(5	) %	$	8,665	$	9,123		(5	) %
Non-interest income		1,153		1,085		6			2,173		2,066		5

Total net revenue⁽²⁾		5,468		5,638		(3	)		10,838		11,189		(3	)
Provision for credit losses		704		762		(8	)		1,439		1,647		(13	)
Non-interest expense:
Marketing		335		330		2			660		647		2
Amortization of intangibles		136		167		(19	)		279		344		(19	)
Acquisition-related		18		50		(64	)		41		96		(57	)
Operating expenses		2,490		2,471		1			4,931		4,922		—

Total non-interest expense		2,979		3,018		(1	)		5,911		6,009		(2	)

Income from continuing operations before income taxes		1,785		1,858		(4	)		3,488		3,533		(1	)
Income tax provision		581		631		(8	)		1,160		1,172		(1	)

Income from continuing operations, net of tax		1,204		1,227		(2	)		2,328		2,361		(1	)
Income (loss) from discontinued operations, net of tax		(10)		(119)		(92	)		20		(197)		**

Net income		1,194		1,108		8			2,348		2,164		9
Dividends and undistributed earnings allocated to participating securities		(4)		(4)		—			(9)		(9)		—
Preferred stock dividends		(13)		(13)		—			(26)		(26)		—

Net income available to common shareholders	$	1,177	$	1,091		8		$	2,313	$	2,129		9

Common share statistics
Earnings per common share:
Basic earnings per common share	$	2.07	$	1.88		10		$	4.06	$	3.66		11
Diluted earnings per common share		2.04		1.85		10			4.00		3.62		10
Weighted average common shares outstanding:
Basic		567.5		581.5		(2	)		569.2		581.0		(2	)
Diluted		577.6		588.8		(2	)		578.9		587.9		(2	)
Dividends per common share		0.30		0.30		—			0.60		0.35		71
Average balances
Loans held for investment⁽³⁾	$	194,996	$	190,562		2		$	194,362	$	193,265		1
Interest-earning assets		263,570		266,544		(1	)		263,119		269,008		(2	)
Total assets		294,744		297,748		(1	)		294,498		300,290		(2	)
Interest-bearing deposits		182,053		189,311		(4	)		182,431		189,958		(4	)
Total deposits		206,315		210,650		(2	)		206,080		211,100		(2	)
Borrowings		35,658		36,915		(3	)		35,817		39,232		(9	)
Common equity		42,797		40,637		5			42,408		40,335		5
Total stockholders’ equity		43,767		41,490		5			43,320		41,188		5
Selected performance metrics
Purchase volume⁽⁴⁾	$	56,358	$	50,788		11		$	103,792	$	95,886		8
Total net revenue margin⁽⁵⁾		8.30%		8.46%		(16	) bps		8.24%		8.32%		(8	) bps
Net interest margin⁽⁶⁾		6.55		6.83		(28	)		6.59		6.78		(19	)
Return on average assets		1.63		1.65		(2	)		1.58		1.57		1
Return on average tangible assets⁽⁷⁾		1.73		1.74		(1	)		1.67		1.66		1
Return on average common equity⁽⁸⁾		11.09		11.91		(82	)		10.81		11.53		(72	)
Return on average tangible common equity⁽⁹⁾		17.47		19.62		(215	)		17.15		19.18		(203	)
Equity-to-assets ratio		14.85		13.93		92			14.71		13.72		99
Non-interest expense as a % of average loans held for investment		6.11		6.33		(22	)		6.08		6.22		(14	)
Efficiency ratio⁽¹⁰⁾		54.48		53.53		95			54.54		53.70		84
Effective income tax rate from continuing operations		32.5		34.0		(150	)		33.3		33.2		10
Net charge-offs	$	812	$	969		(16	) %	$	1,743	$	2,048		(15	) %
Net charge-off rate⁽¹¹⁾		1.67%		2.03%		(36	) bps		1.79%		2.12%		(33	) bps
Net charge-off rate (excluding Acquired Loans)		1.93		2.46		(53	)		2.08		2.58		(50	)


		3		Capital One Financial Corporation (COF)


(Dollars in millions except per share data as noted)	June 30, 2014		December 31, 2013		Change
Balance sheet (period end)
Loans held for investment⁽³⁾	$	198,528	$	197,199		1	%
Interest-earning assets		266,720		265,170		1
Total assets		298,317		296,933		—
Interest-bearing deposits		180,970		181,880		(1	)
Total deposits		205,890		204,523		1
Borrowings		39,114		40,654		(4	)
Common equity		42,477		40,779		4
Total stockholders’ equity		43,815		41,632		5
Credit quality metrics (period end)
Allowance for loan and lease losses	$	3,998	$	4,315		(7	)
Allowance as a % of loans held for investment (“allowance coverage ratio”)		2.01%		2.19%		(18	) bps
Allowance as a % of loans held for investment (excluding Acquired Loans)		2.30		2.54		(24	)
30+ day performing delinquency rate		2.24		2.63		(39	)
30+ day performing delinquency rate (excluding Acquired Loans)		2.58		3.08		(50	)
30+ day delinquency rate		2.53		2.96		(43	)
30+ day delinquency rate (excluding Acquired Loans)		2.91		3.46		(55	)
Capital ratios⁽¹²⁾
Common equity Tier 1 capital ratio		12.72%		N/A		**
Tier 1 common ratio		N/A		12.19%		**
Tier 1 risk-based capital ratio		13.31		12.57		74	bps
Total risk-based capital ratio		15.36		14.69		67
Tier 1 leverage ratio		10.70		10.06		64
Tangible common equity (“TCE”) ratio⁽¹³⁾		9.52		8.89		63
Associates
Employees (in thousands), period end⁽¹⁴⁾		44.6		45.4		(2	) %

**	Change is not meaningful.

⁽¹⁾

We adopted ASU 2014-01 “Accounting for Investments in Qualified Affordable Housing Projects” (Investments in Qualified Affordable Housing Projects) as of January 1, 2014. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results and related metrics have been recast to conform to this presentation.

⁽²⁾

Total net revenue was reduced by $153 million and $316 million in the second quarter and first six months of 2014, respectively, and by $192 million and $457 million in the second quarter and first six months of 2013, respectively, for the estimated uncollectible amount of billed finance charges and fees.

⁽³⁾	Loans held for investment includes loans acquired in the CCB, ING Direct and 2012 U.S. card acquisitions. See “Note 4—Loans” for additional information on Acquired Loans.

⁽⁴⁾	Consists of credit card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

⁽⁵⁾	Calculated based on annualized total net revenue for the period divided by average interest-earning assets for the period.

⁽⁶⁾	Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

⁽⁷⁾	Calculated based on annualized income from continuing operations, net of tax, for the period divided by average tangible assets for the period. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.

⁽⁸⁾

⁽⁹⁾

Calculated based on the annualized sum of (i) income from continuing operations, net of tax; (ii) less dividends and undistributed earnings allocated to participating securities; (iii) less preferred stock dividends, for the period, divided by average tangible common equity. Our calculation of return on average tangible common equity may not be comparable to similarly titled measures reported by other companies. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.


		4		Capital One Financial Corporation (COF)

⁽¹⁰⁾	Calculated based on non-interest expense for the period divided by total net revenue for the period.

⁽¹¹⁾	Calculated based on annualized net charge-offs for the period divided by average loans held for investment for the period.

⁽¹²⁾

Beginning on January 1, 2014, we calculate our regulatory capital under Basel III Standardized Approach subject to transition provisions. Prior to the first quarter of 2014, we calculated regulatory capital measures under Basel I. See “MD&A—Capital Management” and “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information, including the calculation of each of these ratios.

⁽¹³⁾

TCE ratio is a non-GAAP measure calculated based on tangible common equity divided by tangible assets. See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for the calculation of this measure and reconciliation to the comparative GAAP measure.

⁽¹⁴⁾

Effective Q2 2014, we changed our presentation from total full-time equivalent employees to total employees. All prior periods have been recast to conform to the current presentation. During this change, we determined that we had previously understated the total number of full-time equivalent employees by approximately 7%.

INTRODUCTION

General

We are a diversified financial services holding company with banking and non-banking subsidiaries. Capital One Financial Corporation and its subsidiaries (the “Company”) offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet and other distribution channels. As of June 30, 2014, our principal subsidiaries included:

•

Capital One Bank (USA), National Association (“COBNA”), which offers credit and debit card products, other lending products and deposit products; and

•

Capital One, National Association (“CONA”), which offers a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.

The Company is hereafter collectively referred to as “we,” “us” or “our.” COBNA and CONA are collectively referred to as the “Banks.” Certain business terms used in this document are defined in the “Glossary and Acronyms” section and should be read in conjunction with the consolidated financial statements included in this Report.

We had total loans held for investment of $198.5 billion, deposits of $205.9 billion and stockholders’ equity of $43.8 billion as of June 30, 2014, compared with total loans held for investment of $197.2 billion, deposits of $204.5 billion and stockholders’ equity of $41.6 billion as of December 31, 2013.

Our consolidated total net revenues are derived primarily from lending to consumer and commercial customers net of funding costs associated with interest on customer deposits, short-term borrowings and long-term debt. We also earn non-interest income which primarily consists of interchange income net of reward expenses, service charges and other customer-related fees. Our expenses primarily consist of the provision for credit losses, operating expenses (including salaries and associate benefits, occupancy and equipment costs, professional services, communication and data processing expenses and other miscellaneous expenses), marketing expenses and income taxes.

Our principal operations are currently organized for management reporting purposes into three primary business segments, which are defined primarily based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the Other category.

•

Credit Card: Consists of our domestic consumer and small business card lending, national closed-end installment lending and the international card lending businesses in Canada and the United Kingdom.


		5		Capital One Financial Corporation (COF)

•

Consumer Banking: Consists of our branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, national auto lending and consumer home loans lending and servicing activities.

•

Commercial Banking: Consists of our lending, deposit gathering and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion.

Table 2 summarizes our business segment results, which we report based on income from continuing operations, net of tax, for the second quarter and first six months of 2014 and 2013. We provide information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 Form 10-K. We also provide a reconciliation of our total business segment results to our results based on the accounting principles generally accepted in the U.S. (“U.S. GAAP”) results in “Note 13—Business Segments” of this Report.

Table 2: Business Segment Results⁽¹⁾


	Three Months Ended June 30,
	2014								2013
	Total Net Revenue⁽²⁾				Net Income⁽³⁾				Total Net Revenue⁽²⁾				Net Income (Loss)⁽³⁾
(Dollars in millions)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Credit Card	$	3,300		61%	$	668		55%	$	3,636		65%	$	719		58%
Consumer Banking		1,601		29		334		28		1,667		30		444		36
Commercial Banking⁽⁴⁾		545		10		171		14		495		8		181		15
Other⁽⁵⁾		22		—		31		3		(160)		(3)		(117)		(9)

Total from continuing operations	$	5,468		100%	$	1,204		100%	$	5,638		100%	$	1,227		100%


	Six Months Ended June 30,
	2014								2013
	Total Net Revenue⁽²⁾				Net Income⁽³⁾				Total Net Revenue⁽²⁾				Net Income (Loss)⁽³⁾
(Dollars in millions)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Credit Card	$	6,610		61%	$	1,336		57%	$	7,287		65%	$	1,405		59%
Consumer Banking		3,184		29		664		29		3,326		30		827		35
Commercial Banking⁽⁴⁾		1,053		10		308		13		980		9		374		16
Other⁽⁵⁾		(9)		—		20		1		(404)		(4)		(245)		(10)

Total from continuing operations	$	10,838		100%	$	2,328		100%	$	11,189		100%	$	2,361		100%

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾	Total net revenue consists of net interest income and non-interest income.

⁽³⁾	Net income for our business segments is reported based on income from continuing operations, net of tax.

⁽⁴⁾	On investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis.

⁽⁵⁾	Includes the residual impact of the allocation of certain items, our centralized Corporate Treasury group activities, as well as other items as described in “Note 19—Business Segments” in our 2013 Form 10-K.


		6		Capital One Financial Corporation (COF)

EXECUTIVE SUMMARY AND BUSINESS OUTLOOK

We reported net income of $1.2 billion ($2.04 per diluted common share) on total net revenue of $5.5 billion and net income of $2.3 billion ($4.00 per diluted common share) on total net revenue of $10.8 billion for the second quarter and first six months of 2014, respectively. In comparison, we reported net income of $1.1 billion ($1.85 per diluted common share) on total net revenue of $5.6 billion and net income of $2.2 billion ($3.62 per diluted common share) on total net revenue of $11.2 billion for the second quarter and first six months of 2013, respectively.

Beginning on January 1, 2014, we calculate our regulatory capital under the Basel III Standardized Approach subject to transition provisions. Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach including transition provisions, was 12.72% as of June 30, 2014. Our Tier 1 common ratio, as calculated under Basel I, was 12.19% as of December 31, 2013. These numbers are not directly comparable due to methodological differences in the calculation of the ratios.

On March 26, 2014, we announced that our Board of Directors had authorized the repurchase of up to $2.5 billion of shares of our common stock (“2014 Stock Repurchase Program”). Through the end of the second quarter of 2014, we have repurchased approximately $1 billion of common stock and expect to complete the 2014 Stock Repurchase Program by the first quarter of 2015. See “Capital Management” below for additional information.

Below are additional highlights of our performance in the second quarter and first six months of 2014. These highlights generally are based on a comparison between the results of the second quarter and first six months of 2014 and 2013, except as otherwise noted. The changes in our financial condition and credit performance are generally based on our financial condition and credit performance as of June 30, 2014, compared with our financial condition and credit performance as of December 31, 2013. We provide a more detailed discussion of our financial performance in the sections following this “Executive Summary and Business Outlook.”

Total Company

•

Earnings: Our net income increased by $86 million in the second quarter of 2014, or 8%, to $1.2 billion compared to $1.1 billion in the second quarter of 2013, and our net income increased by $184 million in the first six months of 2014, or 9%, to $2.3 billion, compared to $2.2 billion for the first six months of 2013. Significant drivers of the increase in earnings in the second quarter and first six months of 2014 were a decrease in the provision for credit losses due to lower charge-offs; and a pre-tax benefit for mortgage representation and warranty losses of $18 million and $51 million for the second quarter and first six months of 2014, respectively, compared to a pre-tax provision for mortgage representation and warranty losses of $183 million and $280 million for the second quarter and first six months of 2013 respectively. These items were partially offset by a decrease in net interest income attributable to lower average interest-earning assets and lower yields in the Credit Card business.

•

Loans Held for Investment: Period-end loans held for investment increased by $1.3 billion, or 1%, in the first six months of 2014, to $198.5 billion as of June 30, 2014, from $197.2 billion as of December 31, 2013. The increase was due to commercial and industrial and commercial and multifamily real estate loan growth in our Commercial Banking business, and continued strong auto loan originations outpacing the run-off of the acquired home loans portfolio in our Consumer Banking business. Overall, there was a decline in our credit card loan portfolio primarily due to seasonality in the first quarter, partially offset by loan growth in the second quarter in our Credit Card business.

•

Charge-off and Delinquency Statistics: Our net charge-off rate decreased by 36 basis points to 1.67% in the second quarter of 2014, compared to 2.03% in the second quarter of 2013, and our net charge-off rate decreased by 33 basis points in the first six months of 2014, to 1.79%, compared to 2.12% for the first six months of 2013. The decrease in our reported net charge-offs and net charge-off rates were largely due to the improvement in delinquencies and run-off of portfolios with higher credit risk. Our reported 30+ day


		7		Capital One Financial Corporation (COF)

delinquency rate declined to 2.53% as of June 30, 2014, from 2.96% as of December 31, 2013, and 2.71% as of June 30, 2013. The decrease from year end was primarily due to seasonality and strong credit performance. We provide additional information on our credit quality metrics below under “Business Segment Financial Performance” and “Credit Risk Profile.”

•

Allowance for Loan and Lease Losses: We reduced our allowance for loan and lease losses by $317 million to $4.0 billion as of June 30, 2014, from $4.3 billion as of December 31, 2013. The decrease in the allowance for loan and lease losses was mainly due to improvements in delinquency inventories coupled with an improved credit outlook. The allowance coverage ratio declined to 2.01% as of June 30, 2014, from 2.19% as of December 31, 2013.

•

Representation and Warranty Reserve: The representation and warranty reserve decreased by $160 million to $1.0 billion as of June 30, 2014, from $1.2 billion as of December 31, 2013. We recorded a benefit for mortgage representation and warranty losses of $51 million (which includes benefits of $36 million and $15 million in discontinued operations and continuing operations, respectively) in the first six months of 2014. The decrease in representation and warranty reserve was primarily driven by legal developments.

Business Segment Financial Performance

•

Credit Card: Our Credit Card business generated net income from continuing operations of $668 million and $1.3 billion in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $719 million and $1.4 billion in the second quarter and first six months of 2013, respectively. The decreases in net income for these periods were driven by a decrease in net interest income primarily due to the Portfolio Sale in the third quarter of 2013 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by (i) a reduction in the provision for credit losses as a result of lower charge-offs on the underlying loan portfolio; (ii) lower acquisition-related costs; and (iii) lower operating expenses attributable to the Portfolio Sale and operating efficiency. Period-end loans held for investment in our Credit Card business decreased by $2.3 billion to $79.0 billion as of June 30, 2014 from $81.3 billion as of December 31, 2013. The decrease was largely due to seasonal decreases in the first quarter of 2014 partially offset by growth in the second quarter of 2014.

•

Consumer Banking: Our Consumer Banking business generated net income from continuing operations of $334 million and $664 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $444 million and $827 million in the second quarter and first six months of 2013, respectively. The decreases in net income in these periods were primarily attributable to a higher provision for loan and lease losses, net interest margin compression in both retail banking and the auto loans portfolio, partially offset by growth in the auto loans portfolio. Period-end loans held for investment in our Consumer Banking business increased by $300 million to $71.1 billion as of June 30, 2014, from $70.8 billion as of December 31, 2013, due to growth in our auto loans portfolio outpacing the run-off in our home loans portfolio.

•

Commercial Banking: Our Commercial Banking business generated net income from continuing operations of $171 million and $308 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $181 million and $374 million in the second quarter and first six months of 2013, respectively. The decreases in net income for these periods were primarily due to a higher provision for credit losses, reflecting a lower allowance release. We recorded a provision for credit losses of $12 million and $52 million in the second quarter and first six months of 2014, respectively, compared to a benefit of $14 million and $49 million in the second quarter and first six months of 2013, respectively. Higher revenue due to growth in commercial loans was offset by rate spread compression and increased operating expenses associated with continued investments in business growth and the Beech Street Capital acquisition. Period-end loans held for investment in our Commercial Banking business increased by $3.3 billion to $48.3 billion as of June 30, 2014, from $45.0 billion as of December 31, 2013. The increase was driven by strong loan originations in the commercial and industrial and commercial and multifamily real estate businesses.


		8		Capital One Financial Corporation (COF)

Business Outlook

We discuss below our current expectations regarding our total company performance and the performance of each of our business segments over the near-term based on market conditions, the regulatory environment and our business strategies as of the time we filed this Report. The statements contained in this section are based on our current expectations regarding our outlook for our financial results and business strategies. Our expectations take into account, and should be read in conjunction with, our expectations regarding economic trends and analysis of our business as discussed in “Part I—Item 1. Business” and “Part I—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 Form 10-K. Certain statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those in our forward-looking statements. Except as otherwise disclosed, forward-looking statements do not reflect: (i) any change in current dividend or repurchase strategies; (ii) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; or (iii) any changes in laws, regulations or regulatory interpretations, in each case after the date as of which such statements are made. See “Forward-Looking Statements” in this Report for more information on forward-looking statements included in this Report and “Item 1A. Risk Factors” in our 2013 Form 10-K for factors that could materially influence our results.

Total Company Expectations

We continue to expect 2014 pre-provision earnings, excluding non-recurring items, of approximately $10 billion. In addition, we expect modest changes in the components of pre-provision earnings with higher revenue offsetting higher expenses relative to our initial expectations for 2014. We expect an increase in marketing in the second half of 2014, driven by both expected seasonal trends and because of the success and continuing opportunities we see to grow customer relationships, purchase volume, and loans. Although we had a release of allowance in the second quarter, we believe that we are less likely to see allowance releases going forward as we return to growth and considering charge-offs are below historical averages. Actual results are expected to vary from these expectations within a reasonable margin of error.

We expect that pre-provision earnings will rise in 2015, with growth in average loans driving increased revenues, partially offset by higher non-interest expense, as we continue to invest to sustain growth and returns. Although it will vary from quarter to quarter, we expect the full-year 2015 efficiency ratio to be between 53% and 54%, excluding non-recurring items.

We believe our actions have created a balance sheet with strong capital and liquidity. The Federal Reserve did not object to our capital plan submitted in the 2014 CCAR cycle. Pursuant to the capital plan, we expect to maintain our quarterly dividend of $0.30 per share, subject to approval by the Board of Directors. In addition, the Board of Directors authorized the establishment of a share repurchase program to repurchase of up to $2.5 billion of shares of our common stock through the end of the first quarter of 2015. Under this program, we repurchased approximately $1 billion of our shares in the second quarter, and we expect to repurchase an additional $1.5 billion over the next three quarters.

The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position and amount of retained earnings. Our 2014 Stock Repurchase Program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. See “MD&A—Capital Management—Capital Planning and Regulatory Stress Testing” for more information.

Business Segment Expectations

Credit Card: We returned to year-over-year growth in the Domestic Card portfolio in the second quarter. Our estimate of the run-off of acquired card loans is now substantially less than $1 billion for 2014 and we no longer


		9		Capital One Financial Corporation (COF)

expect it to be a significant offset to growth. Overall, we believe that our Domestic Card portfolio continues to be well-positioned and will continue to deliver strong, sustainable and resilient returns and generate capital on a strong trajectory.

Consumer Banking: In our Consumer Banking business, we expect auto credit losses will gradually increase from the historic lows of the past few years and that auto margins and returns will continue to decline, but remain within ranges that support an attractive business. We expect home loans run-off of approximately $6 billion in 2014 based on our current view of interest rates. In addition, we expect the impacts of the prolonged low interest rate environment to continue to pressure the economics of our retail banking deposit businesses, even if rates rise in 2014.

Commercial Banking: In our Commercial Banking business, charge-offs, non-performing loans and criticized loans are at exceptionally low levels and we expect strong credit performance to continue in 2014. As competition continues to increase, it is likely that the pace of the growth in our Commercial Banking business will moderate over time. We continue to expect our focused and specialized approach to deliver strong results in 2014.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K.

We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies govern:

•

Loan loss reserves

•

Asset impairment

•

Fair value of financial instruments

•

Representation and warranty reserves

•

Customer rewards reserves

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions. Management has discussed our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2013 Form 10-K.


		10		Capital One Financial Corporation (COF)

ACCOUNTING CHANGES AND DEVELOPMENTS

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the Financial Accounting Standards Board (“FASB”) issued guidance permitting an entity to account for Investments in Qualified Affordable Housing Projects using the proportional amortization method, if certain criteria are met. The proportional method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. Prior period results and related metrics have been recast. See “Note 1—Summary of Significant Accounting Policies” for more information.

CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our consolidated financial performance for the second quarter and first six months of 2014 and 2013. Following this section, we provide a discussion of our business segment results. You should read this section together with our “Executive Summary and Business Outlook,” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets and the interest expense on our interest-bearing liabilities. Interest-earning assets include loans, investment securities and other interest-earning assets and interest-bearing liabilities include interest-bearing deposits, senior and subordinated notes, securitized debt obligations and other borrowings. We include in interest income any past due fees on loans that we deem collectible. Our net interest margin based on our consolidated results represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities, including the notional impact of non-interest bearing funding. We expect net interest income and our net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities.

Table 3 below presents, for each major category of our interest-earning assets and interest-bearing liabilities, the average outstanding balances, interest income earned, interest expense incurred, average yield and rate for the second quarter and first six months of 2014 and 2013.


		11		Capital One Financial Corporation (COF)

Table 3: Average Balances, Net Interest Income and Net Interest Yield⁽¹⁾


	Three Months Ended June 30,
	2014						2013
(Dollars in millions)	Average Balance		Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate		Average Balance		Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate
Assets:
Interest-earning assets:
Loans:
Credit card:
Domestic credit card	$	69,366	$	2,419		13.95%	$	76,125	$	2,782		14.62%
International credit card		7,621		318		16.69		7,980		323		16.19

Total credit card		76,987		2,737		14.22		84,105		3,105		14.77
Consumer banking		71,049		1,103		6.21		73,065		1,093		5.98
Commercial banking		47,152		412		3.50		39,530		379		3.84
Other		134		27		80.60		174		19		43.68

Total loans, including loans held for sale		195,322		4,279		8.76		196,874		4,596		9.34
Investment securities		62,518		409		2.62		63,907		391		2.45
Cash equivalents and other interest-earning assets		5,730		24		1.68		5,763		23		1.60

Total interest-earning assets	$	263,570	$	4,712		7.15	$	266,544	$	5,010		7.52

Cash and due from banks		2,871						2,677
Allowance for loan and lease losses		(4,099)						(4,604)
Premises and equipment, net		3,808						3,784
Other assets		28,594						29,347

Total assets	$	294,744					$	297,748

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	182,053	$	272		0.60	$	189,311	$	318		0.67
Securitized debt obligations		10,731		39		1.45		10,942		45		1.65
Senior and subordinated notes		16,004		78		1.95		12,692		82		2.58
Other borrowings		8,923		8		0.36		13,281		12		0.36

Total interest-bearing liabilities	$	217,711	$	397		0.73	$	226,226	$	457		0.81

Non-interest bearing deposits		24,262						21,339
Other liabilities		9,004						8,693

Total liabilities		250,977						256,258
Stockholders’ equity		43,767						41,490

Total liabilities and stockholders’ equity	$	294,744					$	297,748

Net interest income/spread			$	4,315		6.42			$	4,553		6.71

Impact of non-interest bearing funding						0.13						0.12

Net interest margin						6.55%						6.83%


		12		Capital One Financial Corporation (COF)


	Six Months Ended June 30,
	2014						2013
(Dollars in millions)	Average Balance		Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate		Average Balance		Interest Income/ Expense⁽²⁾⁽³⁾		Yield/ Rate
Assets:
Interest-earning assets:
Loans:
Credit card:
Domestic credit card	$	69,582	$	4,896		14.07%	$	77,547	$	5,598		14.44%
International credit card		7,655		638		16.67		8,108		652		16.08

Total credit card		77,237		5,534		14.33		85,655		6,250		14.59
Consumer banking		70,943		2,197		6.19		73,756		2,195		5.95
Commercial banking		46,361		807		3.48		39,058		756		3.87
Other		133		48		72.18		179		44		49.16

Total loans, including loans held for sale		194,674		8,586		8.82		198,648		9,245		9.31
Investment securities		62,322		825		2.65		63,930		765		2.39
Cash equivalents and other interest-earning assets		6,123		54		1.76		6,430		51		1.59

Total interest-earning assets	$	263,119	$	9,465		7.19	$	269,008	$	10,061		7.48

Cash and due from banks		2,849						2,475
Allowance for loan and lease losses		(4,202)						(4,778)
Premises and equipment, net		3,823						3,733
Other assets		28,909						29,852

Total assets	$	294,498					$	300,290

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Deposits	$	182,431	$	548		0.60	$	189,958	$	644		0.68
Securitized debt obligations		10,576		77		1.46		11,348		101		1.78
Senior and subordinated notes		15,088		155		2.05		12,340		164		2.66
Other borrowings		10,153		20		0.39		15,544		29		0.37

Total interest-bearing liabilities	$	218,248	$	800		0.73	$	229,190	$	938		0.82

Non-interest bearing deposits		23,649						21,142
Other liabilities		9,281						8,770

Total liabilities		251,178						259,102
Stockholders’ equity		43,320						41,188

Total liabilities and stockholders’ equity	$	294,498					$	300,290

Net interest income/spread			$	8,665		6.46			$	9,123		6.66

Impact of non-interest bearing funding						0.13						0.12

Net interest margin						6.59%						6.78%

⁽¹⁾

In the first quarter of 2014, we adopted the proportional amortization method of accounting for investments in qualified affordable housing projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.


		13		Capital One Financial Corporation (COF)

⁽²⁾

Past due fees included in interest income totaled approximately $336 million and $695 million in the second quarter and first six months of 2014, respectively, and $464 million and $944 million in the second quarter and first six months of 2013, respectively.

⁽³⁾

Interest income and interest expense and the calculation of average yields on interest-earning assets and average rates on interest-bearing liabilities include the impact of hedge accounting.

Net interest income decreased by $238 million, or 5%, from the second quarter of 2013 to $4.3 billion in the second quarter of 2014 primarily driven by a decrease in average interest-earning assets in our Credit Card business, partially offset by lower funding costs. Net interest income of $8.7 billion in the first six months of 2014, decreased by $458 million, or 5%, from the first six months of 2013, primarily driven by a decrease in average interest-earning assets, partially offset by lower funding costs and higher yields in investment securities.

•

Average Interest-Earning Assets: The decrease in average interest-earning assets in the second quarter of 2014, compared to the second quarter of 2013, and in the first six months of 2014, compared to the first six months of 2013, was primarily driven by the Portfolio Sale in the third quarter of 2013, the run-off in our acquired home loans portfolio within our Consumer Banking business, and the run-off of certain receivables acquired in the 2012 U.S. card acquisition, partially offset by continued strong growth in commercial and auto loans. The decrease in average investment securities was due to sales and paydowns outpacing purchases.

•

Net Interest Margin: The decrease in our net interest margin in the second quarter of 2014, compared to the second quarter of 2013, and in the first six months of 2014, compared to the first six months of 2013, was primarily due to lower yields on our credit card and commercial loan portfolios, partially offset by a reduction in our cost of funds and higher yields in our investment securities.

Table 4 displays the change in our net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities; or (ii) changes in the interest rates related to these assets and liabilities.

Table 4: Rate/Volume Analysis of Net Interest Income⁽¹⁾


	Three Months Ended June 30,						Six Months Ended June 30,
	2014 vs 2013						2014 vs. 2013
(Dollars in millions)	Total Variance		Volume		Rate		Total Variance		Volume		Rate
Interest income:
Loans:
Credit card	$	(368)	$	(256)	$	(112)	$	(716)	$	(605)	$	(111)
Consumer banking		10		(30)		40		2		(84)		86
Commercial banking		33		66		(33)		51		127		(76)
Other		8		(4)		12		4		(11)		15

Total loans, including loans held for sale		(317)		(224)		(93)		(659)		(573)		(86)

Investment securities		18		(8)		26		60		(19)		79
Cash equivalents and other interest-earning assets		1		—		1		3		(2)		5

Total interest income		(298)		(232)		(66)		(596)		(594)		(2)

Interest expense:
Deposits		(46)		(12)		(34)		(96)		(25)		(71)
Securitized debt obligations		(6)		—		(6)		(24)		(6)		(18)
Senior and subordinated notes		(4)		16		(20)		(9)		28		(37)
Other borrowings		(4)		(4)		—		(9)		(10)		1

Total interest expense		(60)		—		(60)		(138)		(13)		(125)

Net interest income	$	(238)	$	(232)	$	(6)	$	(458)	$	(581)	$	123


		14		Capital One Financial Corporation (COF)

⁽¹⁾

We calculate the change in interest income and interest expense separately for each item. The portion of interest income or interest expense attributable to both volume and rate is allocated proportionately when the calculation results in a positive value. When the portion of interest income or interest expense attributable to both volume and rate results in a negative value, the total amount is allocated to volume or rate, depending on which amount is positive.

Non-Interest Income

Non-interest income primarily consists of interchange income net of rewards expense, service charges and other customer-related fees, and other non-interest income. Other non-interest income includes the pre-tax provision for mortgage representation and warranty losses related to continuing operations. It also includes gains and losses from the sale of investment securities, gains and losses on derivatives not accounted for in hedge accounting relationships, as well as hedge ineffectiveness.

Table 5 displays the components of non-interest income for the second quarter and first six months of 2014 and 2013.

Table 5: Non-Interest Income


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2014		2013		2014		2013
Service charges and other customer-related fees	$	460	$	534	$	934	$	1,084
Interchange fees, net		535		486		975		931
Net other-than-temporary impairment		(1)		(4)		(6)		(29)
Other non-interest income:
Benefit for mortgage representation and warranty losses⁽¹⁾		29		4		15		14
Net (losses) gains from the sale of investment securities		(1)		1		12		3
Net fair value gains (losses) on free-standing derivatives⁽²⁾		13		2		26		(3)
Other		118		62		217		66

Total other non-interest income		159		69		270		80

Total non-interest income	$	1,153	$	1,085	$	2,173	$	2,066

⁽¹⁾

Represents the benefit for mortgage representation and warranty losses recorded in continuing operations. For the total impact to the provision for mortgage representation and warranty losses, including the portion recognized on our consolidated statements of income as a component of discontinued operations, see “MD&A—Consolidated Balance Sheets Analysis—Table 14: Changes in Representation and Warranty Reserve.”

⁽²⁾

Excludes changes in cumulative credit risk valuation adjustments related to derivatives in a gain position. Credit risk valuation adjustments for derivative assets totaled $5 million and $7 million as of June 30, 2014 and December 31, 2013, respectively. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

Non-interest income increased by $68 million, or 6%, to $1.2 billion in the second quarter of 2014, from $1.1 billion in second quarter of 2013. Non-interest income increased by $107 million, or 5%, to $2.2 billion in the first six months of 2014, from $2.1 billion in the first six months of 2013. The main drivers for the increases in non-interest income were (i) an increase in interchange fees, net due to strong purchase volume in our credit card loan portfolio; and (ii) an increase in the benefit for mortgage representation and warranty losses resulting from legal developments. These were partially offset by a decrease in service charges and other customer-related fees in our Credit Card business reflecting our strategic choice to discontinue certain card-related fees.


		15		Capital One Financial Corporation (COF)

Provision for Credit Losses

Our provision for credit losses in each period is driven by charge-offs, changes to the allowance for loan and lease losses and changes to the reserve for unfunded lending commitments. We recorded a provision for credit losses of $704 million and $1.4 billion in the second quarter and first six months of 2014, respectively, compared with $762 million and $1.6 billion in the second quarter and first six months of 2013, respectively.

The decreases in the provision for credit losses of $58 million and $208 million in the second quarter and first six months of 2014, respectively, were driven by lower charge-offs partially offset by a lower release of the allowance for loan and lease losses. The decrease in our reported net charge-offs was largely due to credit improvement of the underlying portfolio. The decrease in our allowance for loan and lease losses was attributable to an overall improved credit outlook coupled with improvements in delinquency inventories.

We provide additional information on the provision for credit losses and changes in the allowance for loan and lease losses within “Credit Risk Profile—Summary of Allowance for Loan and Lease Losses,” “Note 4—Loans” and “Note 5—Allowance for Loan and Lease Losses.” For information on the allowance methodology for each of our loan categories, see “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K.

Non-Interest Expense

Non-interest expense consists of ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses and other miscellaneous expenses, as well as marketing costs, merger-related expenses and amortization of intangibles. Table 6 displays the components of non-interest expense for the second quarter and first six months of 2014 and 2013.

Table 6: Non-Interest Expense⁽¹⁾⁽²⁾


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2014		2013		2014		2013
Salaries and associate benefits	$	1,125	$	1,118	$	2,286	$	2,213
Occupancy and equipment		447		371		852		728
Marketing		335		330		660		647
Professional services		296		340		583		662
Communications and data processing		203		236		399		452
Amortization of intangibles		136		167		279		344
Other non-interest expense:
Collections		98		119		197		248
Fraud losses		57		53		130		105
Bankcard, regulatory and other fee assessments		114		142		227		280
Other		168		142		298		330

Other non-interest expense		437		456		852		963

Total non-interest expense	$	2,979	$	3,018	$	5,911	$	6,009

⁽¹⁾	In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾

Includes acquisition-related costs of $18 million and $41 million in the second quarter and first six months of 2014, respectively as compared with $50 million and $96 million in the second quarter and first six months of 2013, respectively. These amounts are comprised of transaction costs, legal and other professional or consulting fees, restructuring costs, and integration expense.


		16		Capital One Financial Corporation (COF)

Non-interest expense decreased by $39 million, or 1%, to $3.0 billion in the second quarter of 2014, from $3.0 billion in the second quarter of 2013. Non-interest expense decreased by $98 million, or 2%, to $5.9 billion in the first six months of 2014, from $6.0 billion in the first six months of 2013. The decrease reflects a reduction in acquisition-related costs and a decline in amortization of intangibles. These were partially offset by (i) higher operating expenses attributable to growth in our auto loans portfolio; (ii) the change to include auto repossession-related expenses as a component of operating expenses (prior to January 1, 2014 these costs were reported as a component of net charge-offs); and (iii) higher operating expenses attributable to growth in our Commercial Banking business, partially offset by lower bankcard, regulatory and other fee assessments and communication and data processing expenses.

Income Taxes

We recorded income tax provisions of $581 million (32.5% effective income tax rate) and $1.2 billion (33.3% effective income tax rate) in the second quarter and first six months of 2014, respectively, compared to income tax provisions of $631 million (34.0% effective income tax rate) and $1.2 billion (33.2% effective income tax rate) in the second quarter and first six months of 2013, respectively. The decrease in our effective income tax rate in the second quarter of 2014 from the second quarter of 2013, was primarily attributable to increased tax credits and tax exempt income, as well as a reduction in unfavorable net discrete tax expense. The slight increase in our effective income tax rate in the first six months of 2014 from the first six months of 2013 was primarily attributable to increased discrete tax expense in the first six months of 2014 over the first six months of 2013, partially offset by increased tax credits and tax exempt income. Our effective income tax rate, excluding the impact of discrete tax items discussed above, was 32.5% in both the second quarter and first six months of 2014, and 33.5%, and 33.1% in the second quarter and first six months of 2013, respectively.

We provide additional information on items affecting our income taxes and effective tax rate in our 2013 Form 10-K in “Note 17—Income Taxes.”

Income (Loss) from Discontinued Operations, Net of Tax

Income (loss) from discontinued operations reflects ongoing costs, which primarily consist of mortgage loan repurchase representation and warranty charges, related to the mortgage origination operations of GreenPoint’s wholesale mortgage banking unit that we closed in 2007. Loss from discontinued operations, net of tax, was $10 million and income from discontinued operations, net of tax, was $20 million as of the second quarter and first six months of 2014, respectively, compared to losses of $119 million and $197 million in the second quarter and first six months of 2013, respectively. The pre-tax portion of the provision for mortgage representation and warranty losses recognized on our consolidated statements of income as a component of discontinued operations was a provision of $11 million ($7 million net of tax) and a benefit of $36 million ($23 million net of tax) in the second quarter and first six months of 2014, respectively, and provisions of $187 million ($117 million net of tax) and $294 million ($184 million net of tax) in the second quarter and first six months of 2013, respectively.

We provide additional information on the provision for mortgage representation and warranty losses and the related reserve for potential representation and warranty claims in “Consolidated Balance Sheets Analysis—Potential Mortgage Representation and Warranty Liabilities” and “Note 14—Commitments, Contingencies, Guarantees, and Others.”


		17		Capital One Financial Corporation (COF)

BUSINESS SEGMENT FINANCIAL PERFORMANCE

Our principal operations are currently organized into three major business segments, which are defined based on the products and services provided or the type of customer served: Credit Card, Consumer Banking and Commercial Banking. The operations of acquired businesses have been integrated into our existing business segments. Certain activities that are not part of a segment, such as management of our corporate investment portfolio and asset/liability management by our centralized Corporate Treasury group, are included in the “Other” category.

The results of our individual businesses, which we report on a continuing operations basis, reflect the manner in which management evaluates performance and makes decisions about funding our operations and allocating resources. We provide additional information on the allocation methodologies used to derive our business segment results in “Note 19—Business Segments” in our 2013 Form 10-K.

We refer to the business segment results derived from our internal management accounting and reporting process as our “managed” presentation, which differs in some cases from our reported results prepared based on U.S. GAAP. There is no comprehensive authoritative body of guidance for management accounting equivalent to U.S. GAAP; therefore, the managed presentation of our business segment results may not be comparable to similar information provided by other financial service companies. In addition, our individual business segment results should not be used as a substitute for comparable results determined in accordance with U.S. GAAP.

Below we summarize our business segment results for the second quarter and first six months of 2014 and 2013 and provide a comparative discussion of these results. We also discuss changes in our financial condition and credit performance statistics as of June 30, 2014, compared with December 31, 2013. We provide a reconciliation of our total business segment results to our reported consolidated results in “Note 13—Business Segments.” Additionally, we provide information on the outlook for each of our business segments as described above under “Executive Summary and Business Outlook.”

Credit Card Business

The primary sources of revenue for our Credit Card business are interest income, fees collected from customers and interchange fees. Expenses primarily consist of the provision for credit losses, operating costs such as salaries and associate benefits, occupancy and equipment, professional services, communications and data processing expenses and marketing expenses. Rewards costs are generally netted against interchange fees.

Our Credit Card business generated net income from continuing operations of $668 million and $1.3 billion in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $719 million and $1.4 billion in the second quarter and first six months of 2013, respectively.

Table 7 summarizes the financial results of our Credit Card business, which is comprised of Domestic Card and International Card, and displays selected key metrics for the periods indicated.


		18		Capital One Financial Corporation (COF)

Table 7: Credit Card Business Results


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in millions)	2014		2013		Change			2014		2013		Change
Selected income statement data:
Net interest income	$	2,461	$	2,804		(12)	%	$	4,986	$	5,634		(12)	%
Non-interest income		839		832		1			1,624		1,653		(2)

Total net revenue⁽¹⁾		3,300		3,636		(9)			6,610		7,287		(9)
Provision for credit losses		549		713		(23)			1,107		1,456		(24)
Non-interest expense		1,719		1,819		(5)			3,445		3,667		(6)

Income from continuing operations before income taxes		1,032		1,104		(7)			2,058		2,164		(5)
Income tax provision		364		385		(5)			722		759		(5)

Income from continuing operations, net of tax	$	668	$	719		(7)		$	1,336	$	1,405		(5)

Selected performance metrics:
Average loans held for investment⁽²⁾	$	76,997	$	77,946		(1)		$	77,248	$	80,435		(4)
Average yield on loans held for investment⁽³⁾		14.22%		15.94%		(172)	bps		14.33%		15.54%		(121)	bps
Total net revenue margin⁽⁴⁾		17.14		18.66		(152)			17.11		18.12		(101)
Net charge-offs	$	685	$	850		(19)	%	$	1,465	$	1,772		(17)	%
Net charge-off rate		3.56%		4.36%		(80)	bps		3.79%		4.41%		(62)	bps
Card loan premium amortization and other intangible accretion⁽⁵⁾	$	31	$	57		(46)	%	$	68	$	114		(40)	%
PCCR intangible amortization		94		110		(15)			192		226		(15)
Purchase volume⁽⁶⁾		56,358		50,788		11			103,792		95,886		8

(Dollars in millions)	June 30, 2014		December 31, 2013		Change
Selected period-end data:
Loans held for investment⁽²⁾	$	79,018	$	81,305		(3)	%
30+ day performing delinquency rate		2.89%		3.46%		(57)	bps
30+ day delinquency rate		2.97		3.54		(57)
Nonperforming loan rate		0.10		0.11		(1)
Allowance for loan and lease losses	$	2,858	$	3,214		(11)	%
Allowance coverage ratio⁽⁷⁾		3.62%		3.95%		(33)	bps

⁽¹⁾

We recognize billed finance charges and fee income on open-ended loans in accordance with the contractual provisions of the credit arrangements and estimate the uncollectible amount on a quarterly basis. The estimated uncollectible amount of billed finance charges and fees is reflected as a reduction in revenue and is not included in our net charge-offs. Total net revenue was reduced by $153 million and $316 million in the second quarter and first six months of 2014, respectively, and by $192 million and $457 million in the second quarter and first six months of 2013, respectively, for the estimated uncollectible amount of billed finance charges and fees. The finance charge and fee reserve totaled $182 million and $190 million as of June 30, 2014 and December 31, 2013, respectively.

⁽²⁾

Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

⁽³⁾

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income also includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the average yield for the total Credit Card business of 152 and 124 basis points in the second quarter and first six months of 2013, respectively.

⁽⁴⁾

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period for the specified loan category. Annualized interest income also includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the net revenue margin for the total Credit Card business of 169 and 139 basis points in the second quarter and first six months of 2013, respectively.

⁽⁵⁾

Represents the net reduction in interest income attributable to the amortization of premiums on purchased loans accounted for based on contractual cash flows and the accretion of other intangibles associated with the 2012 U.S. card acquisition.


		19		Capital One Financial Corporation (COF)

⁽⁶⁾

Consists of credit card purchase transactions, net of returns for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

⁽⁷⁾

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Credit Card business for the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, and changes in financial condition and credit performance between June 30, 2014 and December 31, 2013 include the following:

•

Net Interest Income: Net interest income decreased by $343 million, or 12%, in the second quarter of 2014 from the second quarter of 2013, to $2.5 billion, and by $648 million, or 12%, in the first six months of 2014 from the first six months of 2013, to $5.0 billion. The decrease in net interest income was primarily driven by the Portfolio Sale in the third quarter of 2013 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition.

•

Non-Interest Income: Non-interest income increased by $7 million, or 1%, in the second quarter of 2014 from the second quarter of 2013, to $839 million, and decreased by $29 million, or 2%, in the first six months of 2014 from the first six months of 2013, to $1.6 billion. The decrease in the first six months of 2014 compared to the first six months of 2013 was largely due to a reduction in customer fees, partially offset by increased interchange fees, net driven by higher purchase volume.

•

Provision for Credit Losses: The provision for credit losses decreased by $164 million, or 23%, in the second quarter of 2014 from the second quarter of 2013, to $549 million, and by $349 million, or 24%, in the first six months of 2014 from the first six months of 2013, to $1.1 billion. The decrease was driven by lower charge-offs in the second quarter and first six months of 2014 attributable to lower delinquencies in the underlying loan portfolio.

•

Non-Interest Expense: Non-interest expense decreased by $100 million, or 5%, in the second quarter of 2014 from the second quarter of 2013, to $1.7 billion, and by $222 million, or 6%, in the first six months of 2014 from the first six months of 2013, to $3.4 billion. The decrease was largely due to lower acquisition-related costs and operating expenses associated with the Portfolio Sale in the third quarter of 2013, as well as operating efficiencies. Non-interest expense also included PCCR intangible amortization of $192 million in the first six months of 2014, compared with $226 million in the first six months of 2013.

•

Loans Held for Investment: Period-end loans held for investment decreased by $2.3 billion, or 3%, to $79.0 billion as of June 30, 2014, from $81.3 billion as of December 31, 2013. The decrease was largely due to expected seasonal decreases in the first quarter 2014 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by growth in the credit card loan portfolio in the second quarter of 2014.

•

Charge-off and Delinquency Statistics: Our reported net charge-off rate decreased to 3.56% and 3.79% in the second quarter and first six months of 2014, respectively, from 4.36% and 4.41% in the second quarter and first six months of 2013, respectively. The decrease was largely due to continued economic improvement and portfolio seasoning. The 30+ day delinquency rate decreased to 2.97% as of June 30, 2014, from 3.54% as of December 31, 2013 primarily due to seasonality and strong credit performance.

Domestic Card Business

Domestic Card generated net income from continuing operations of $607 million and $1.2 billion in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $638 million and $1.3 billion in the second quarter and first six months of 2013, respectively. Domestic Card accounted for 90% of total net revenues in the second quarter and first six months of 2014 and 2013, for our Credit Card business.


		20		Capital One Financial Corporation (COF)

Table 7.1 summarizes the financial results for Domestic Card and displays selected key metrics for the periods indicated.

Table 7.1: Domestic Card Business Results


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in millions)	2014		2013		Change			2014		2013		Change
Selected income statement data:
Net interest income	$	2,193	$	2,536		(14)	%	$	4,448	$	5,092		(13)	%
Non-interest income		768		737		4			1,470		1,461		1

Total net revenue		2,961		3,273		(10)			5,918		6,553		(10)
Provision for credit losses		504		647		(22)			990		1,294		(23)
Non-interest expense		1,513		1,635		(7)			3,058		3,268		(6)

Income from continuing operations before income taxes		944		991		(5)			1,870		1,991		(6)
Income tax provision		337		353		(5)			668		709		(6)

Income from continuing operations, net of tax	$	607	$	638		(5)		$	1,202	$	1,282		(6)

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	69,376	$	69,966		(1)		$	69,592	$	72,327		(4)
Average yield on loans held for investment⁽²⁾		13.95%		15.91%		(196)	bps		14.07%		15.48%		(141)	bps
Total net revenue margin⁽³⁾		17.07		18.71		(164)			17.01		18.12		(111)
Net charge-offs	$	610	$	749		(19)	%	$	1,310	$	1,576		(17)	%
Net charge-off rate		3.52%		4.28%		(76)	bps		3.77%		4.36%		(59)	bps
Card loan premium amortization and other intangible accretion⁽⁴⁾	$	31	$	57		(46)	%	$	68	$	114		(40)	%
PCCR intangible amortization		94	$	110		(15)			192		226		(15)
Purchase volume⁽⁵⁾		52,653		47,273		11			96,792		89,104		9

(Dollars in millions)	June 30, 2014		December 31, 2013		Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	71,165	$	73,255		(3)	%
30+ day delinquency rate		2.83%		3.43%		(60)	bps
Allowance for loan and lease losses	$	2,516	$	2,836		(11)	%
Allowance coverage ratio⁽⁶⁾		3.54%		3.87%		(33)	bps

⁽¹⁾

Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the estimated uncollectible amount.

⁽²⁾

Calculated by dividing annualized interest income for the period by average loans held for investment during the period for the specified loan category. Annualized interest income includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the average yield for the Domestic Card business of 168 and 136 basis points in the second quarter and first six months of 2013, respectively.

⁽³⁾

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period. Annualized interest income includes interest income on loans held for sale. The transfer of the Best Buy loan portfolio from loans held for investment to loans held for sale resulted in an increase in the net revenue margin for the Domestic Card business of 188 and 154 basis points in the second quarter and first six months of 2013, respectively.

⁽⁴⁾

⁽⁵⁾

Consists of domestic card purchase transactions, net of returns, for the period for both loans classified as held for investment and loans classified as held for sale. Excludes cash advance and balance transfer transactions.

⁽⁶⁾

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.


		21		Capital One Financial Corporation (COF)

Because our Domestic Card business accounts for the substantial majority of our Credit Card business, the key factors driving the results for this division are similar to the key factors affecting our total Credit Card business. The primary drivers of the decline in net income for our Domestic Card business in the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, were declines in revenue primarily driven by the Portfolio Sale in the third quarter of 2013 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by a lower provision for credit losses, lower acquisition-related costs, as well as lower operating expenses attributable to the Portfolio Sale in 2013 and operating efficiencies.

The decrease in period-end loans held for investment was due to the expected seasonal decreases in the first quarter of 2014 and the run-off of certain credit card loans acquired in the 2012 U.S. card acquisition, partially offset by the growth in the credit card loan portfolio in the second quarter of 2014.

International Card Business

International Card generated net income from continuing operations of $61 million and $134 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $81 million and $123 million in the second quarter and first six months of 2013, respectively. International Card accounted for 10% of total net revenues in the second quarter and first six months of 2014 and 2013, for our Credit Card business.

Table 7.2 summarizes the financial results for International Card and displays selected key metrics for the periods indicated.


		22		Capital One Financial Corporation (COF)

Table 7.2: International Card Business Results


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in millions)	2014		2013		Change			2014		2013		Change
Selected income statement data:
Net interest income	$	268	$	268		—	%	$	538	$	542		(1)	%
Non-interest income.		71		95		(25)			154		192		(20)

Total net revenue		339		363		(7)			692		734		(6)
Provision for credit losses		45		66		(32)			117		162		(28)
Non-interest expense		206		184		12			387		399		(3)

Income from continuing operations before income taxes		88		113		(22)			188		173		9
Income tax provision		27		32		(16)			54		50		8

Income from continuing operations, net of tax	$	61	$	81		(25)		$	134	$	123		9

Selected performance metrics:
Average loans held for investment⁽¹⁾	$	7,621	$	7,980		(4)		$	7,656	$	8,108		(6)
Average yield on loans held for investment⁽²⁾		16.74%		16.19%		55	bps		16.69%		16.08%		61	bps
Total net revenue margin⁽³⁾		17.76		18.20		(44)			18.07		18.11		(4)
Net charge-offs.	$	75	$	101		(26)	%	$	155	$	196		(21)	%
Net charge-off rate		3.93%		5.08%		(115)	bps		4.05%		4.83%		(78)	bps
Purchase volume⁽⁴⁾	$	3,705	$	3,515		5	%	$	7,000	$	6,782		3	%

(Dollars in millions)	June 30, 2014		December 31, 2013		Change
Selected period-end data:
Loans held for investment⁽¹⁾	$	7,853	$	8,050		(2)	%
30+ day performing delinquency rate		3.40%		3.71%		(31)	bps
30+ day delinquency rate		4.20		4.56		(36)
Nonperforming loan rate		1.03		1.10		(7)
Allowance for loan and lease losses	$	342	$	378		(10)	%
Allowance coverage ratio⁽⁵⁾		4.36%		4.70%		(34)	bps

⁽¹⁾

Period-end loans held for investment and average loans held for investment include accrued finance charges and fees, net of the uncollectible amount.

⁽²⁾

Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽³⁾

Calculated by dividing annualized total net revenue for the period by average loans held for investment during the period.

⁽⁴⁾

Consists of international card purchase transactions, net of returns for the period. Excludes cash advance and balance transfer transactions.

⁽⁵⁾

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

The decrease in net income in the second quarter of 2014 compared to the second quarter of 2013 was primarily due to a build of $37 million in our U.K. cross sell reserves in the second quarter of 2014 related to the number of customer claims declining at a slower pace than we previously expected. The cross sell provision is split evenly and recorded in revenue and in non-interest expense.


		23		Capital One Financial Corporation (COF)

The increase in net income in the first six months of 2014 compared to the first six months of 2013 was primarily due to a reduction in the provision for credit losses attributable to lower net charge-offs, reflecting the improvement in the credit environment in Canada and the U.K. These were partially offset by the U.K. cross sell reserve build.

Consumer Banking Business

The primary sources of revenue for our Consumer Banking business are net interest income from loans and deposits and non-interest income from customer fees. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy and equipment costs, professional services, communications and data processing expenses, as well as marketing expenses.

Our Consumer Banking business generated net income from continuing operations of $334 million and $664 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $444 million and $827 million in the second quarter and first six months of 2013, respectively.

Table 8 summarizes the financial results of our Consumer Banking business and displays selected key metrics for the periods indicated.


		24		Capital One Financial Corporation (COF)

Table 8: Consumer Banking Business Results


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in millions)	2014		2013		Change			2014		2013		Change
Selected income statement data:
Net interest income	$	1,431	$	1,478		(3)	%	$	2,864	$	2,956		(3)	%
Non-interest income		170		189		(10)			320		370		(14)

Total net revenue		1,601		1,667		(4)			3,184		3,326		(4)
Provision for credit losses		143		67		113			283		242		17
Non-interest expense		938		910		3			1,868		1,800		4

Income from continuing operations before income taxes		520		690		(25)			1,033		1,284		(20)
Income tax provision		186		246		(24)			369		457		(19)

Income from continuing operations, net of tax	$	334	$	444		(25)		$	664	$	827		(20)

Selected performance metrics:
Average loans held for investment:⁽¹⁾
Auto	$	33,972	$	28,677		18		$	33,184	$	28,080		18
Home loan		33,299		40,532		(18)			33,969		41,771		(19)
Retail banking		3,613		3,721		(3)			3,621		3,753		(4)

Total consumer banking	$	70,884	$	72,930		(3)		$	70,774	$	73,604		(4)

Average yield on loans held for investment⁽²⁾		6.22%		5.99%		23	bps		6.20%		5.96%		24	bps
Average deposits	$	169,694	$	170,733		(1)	%	$	169,188	$	170,910		(1)	%
Average deposit interest rate		0.57%		0.64%		(7)	bps		0.57%		0.64%		(7)	bps
Core deposit intangible amortization	$	28	$	35		(20)	%	$	58	$	72		(19)	%
Net charge-offs		122		110		11			270		253		7
Net charge-off rate		0.69%		0.60%		9	bps		0.76%		0.69%		7	bps
Net charge-off rate (excluding Acquired Loans)		1.09		1.08		1			1.23		1.27		(4)
Auto loan originations	$	5,376	$	4,525		19	%	$	10,103	$	8,314		22	%

(Dollars in millions)	June 30, 2014		December 31, 2013		Change
Selected period-end data:
Loans held for investment:⁽¹⁾
Auto	$	34,792	$	31,857		9	%
Home loan		32,644		35,282		(7)
Retail banking		3,626		3,623		—

Total consumer banking	$	71,062	$	70,762		—

30+ day performing delinquency rate		2.91%		3.20%		(29)	bps
30+ day performing delinquency rate (excluding Acquired Loans)⁽³⁾		4.56		5.32		(76)
30+ day delinquency rate		3.49		3.89		(40)
30+ day delinquency rate (excluding Acquired Loans)⁽³⁾		5.47		6.47		(100)
Nonperforming loans rate		0.75		0.86		(11)
Nonperforming loans rate (excluding Acquired Loans)⁽³⁾.		1.17		1.44		(27)
Nonperforming asset rate⁽⁴⁾		1.01		1.12		(11)
Nonperforming asset rate (excluding Acquired Loans)⁽³⁾		1.57		1.86		(29)
Allowance for loan and lease losses	$	765	$	752		2	%
Allowance coverage ratio⁽⁵⁾		1.08%		1.06%		2	bps
Deposits	$	169,153	$	167,652		1	%
Loans serviced for others		6,944		7,665		(9)


		25		Capital One Financial Corporation (COF)

⁽¹⁾

Includes Acquired Loans with carrying values of $25.8 billion and $28.2 billion as of June 30, 2014 and December 31, 2013, respectively. The average balance of Consumer Banking loans held for investment, excluding Acquired Loans, was $44.7 billion and $40.2 billion in the second quarter of 2014 and 2013, respectively, and $43.9 billion and $39.7 billion in the first six months of 2014 and 2013, respectively.

⁽²⁾

Calculated by dividing annualized interest income for the period by average loans held for investment during the period.

⁽³⁾

Calculation of ratio adjusted to exclude the impact from Acquired Loans. See “Credit Risk Profile” and “Note 4—Loans” for additional information on the impact of Acquired Loans on our credit quality metrics.

⁽⁴⁾

Calculated by dividing nonperforming assets as of the end of the period by the sum of period-end loans held for investment, foreclosed properties, and other foreclosed assets.

⁽⁵⁾

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Consumer Banking business for the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, and changes in financial condition and credit performance between June 30, 2014 and December 31, 2013 include the following:

•

Net Interest Income: Net interest income decreased by $47 million, or 3%, in the second quarter of 2014 from the second quarter of 2013, to $1.4 billion, and by $92 million, or 3%, in the first six months of 2014 from the first six months of 2013, to $2.9 billion. The decrease in net interest income was primarily attributable to compression in deposit spreads in retail banking and lower net interest income due to the run-off in the acquired home loans portfolio, partially offset by higher net interest income generated by growth in our auto loans portfolio.

Consumer Banking yields increased in both the second quarter and first six months of 2014 to 6.2%, as compared to 6.0% in both the second quarter and first six months of 2013. This increase was driven by changes in the product mix in Consumer Banking as a result of growth in our auto loans portfolio and the run-off of the acquired home loans portfolio. While the shift to auto loans drove an increase in the total Consumer Banking yield, the average yield on auto loans decreased to 8.8% in the second quarter of 2014 as compared to 10.0% in the second quarter of 2013, and decreased to 8.9% in the first six months of 2014, as compared to 10.1% in the first six months of 2013. This decrease was primarily attributable to a shift in the credit quality mix of our auto loans portfolio and increased competition in the auto business. The average yield on home loans was 3.7% in both the second quarter and the first six months of 2014, compared to 3.2% in both the second quarter and the first six months of 2013. The higher yield in the home loans portfolio was driven by an increase in expected cash flows as a result of credit improvement on the acquired portfolios.

•

Non-Interest Income: Non-interest income decreased by $19 million, or 10%, in the second quarter of 2014 from the second quarter of 2013, to $170 million, and by $50 million, or 14%, in the first six months of 2014 from the first six months of 2013, to $320 million, primarily driven by a higher provision for representation and warranty losses in our home loans portfolio related to our continuing operations in the first quarter of 2014 and a gain on the sale of certain of our mortgage servicing rights (“MSR”) in the second quarter of 2013.

•

Provision for Credit Losses: The provision for credit losses increased by $76 million, or 113%, in the second quarter of 2014 from the second quarter of 2013, to $143 million, driven by a larger allowance build due to the growth in our auto loans portfolio and smaller allowance releases attributable to our home loans portfolio. The provision for credit losses increased by $41 million, or 17%, in the first six months of 2014 from the first six months of 2013, to $283 million, driven by higher charge-offs and smaller allowance releases.

•

Non-Interest Expense: Non-interest expense increased by $28 million, or 3%, in the second quarter of 2014 from the second quarter of 2013, to $938 million and by $68 million, or 4%, in the first six months of 2014 from the first six months of 2013, to $1.9 billion. The increase was largely due to the growth in our auto loans portfolio and to a smaller degree, the change to include the auto repossession-related expenses as a component of operating expenses. Prior to January 1, 2014, these costs were reported as a component of net charge-offs.


		26		Capital One Financial Corporation (COF)

•

Loans Held for Investment: Period-end loans held for investment increased by $300 million, or less than 1%, in the first six months of 2014 to $71.1 billion as of June 30, 2014 from $70.8 billion as of December 31, 2013, primarily due to the growth in the auto loans portfolio, partially offset by the run-off of our acquired home loans portfolio.

•

Deposits: Period-end deposits increased by $1.5 billion, or 1%, in the first six months of 2014 to $169.2 billion as of June 30, 2014, from $167.7 billion as of December 31, 2013, driven by deposit growth in our Consumer Banking business.

•

Charge-off and Delinquency Statistics: The reported net charge-off rate increased by 9 basis points to 0.69% in the second quarter of 2014 from 0.60% in the second quarter of 2013, and increased by 7 basis points to 0.76% in the first six months of 2014 from 0.69% in the first six months of 2013. The 30+ day delinquency rate decreased to 3.49% as of June 30, 2014, from 3.89% as of December 31, 2013. The increase in the net charge-off rate reflected a mix shift toward auto loans (which typically carry higher charge-off rates than our home loans portfolio), as home loans run off.

Commercial Banking Business

The primary sources of revenue for our Commercial Banking business are net interest income from loans and deposits and non-interest income from customer fees. Because we have some investments that generate tax-exempt income or tax credits, we make certain reclassifications to our Commercial Banking business results to present revenues on a taxable-equivalent basis. Expenses primarily consist of the provision for credit losses, ongoing operating costs, such as salaries and associate benefits, occupancy, equipment, professional services, communications and data processing expenses, as well as marketing expenses.

On January 1, 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. The proportional amortization method amortizes the cost of the investment over the period in which we will receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of income taxes attributable to continuing operations. Historically, these investments were accounted for under the equity method of accounting and the passive losses related to the investments were recognized within non-interest expense. See “Note 1—Summary of Significant Accounting Policies” for more information.

Our Commercial Banking business generated net income from continuing operations of $171 million and $308 million in the second quarter and first six months of 2014, respectively, compared with net income from continuing operations of $181 million and $374 million in the second quarter and first six months of 2013, respectively.

Table 9 summarizes the financial results of our Commercial Banking business and displays selected key metrics for the periods indicated.


		27		Capital One Financial Corporation (COF)

Table 9: Commercial Banking Business Results⁽¹⁾


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollars in millions)	2014		2013		Change			2014		2013		Change
Selected income statement data:
Net interest income	$	436	$	402		8	%	$	857	$	803		7	%
Non-interest income		109		93		17			196		177		11

Total net revenue⁽²⁾		545		495		10			1,053		980		7
Provision (benefit) for credit losses		12		(14)		**			52		(49)		**
Non-interest expense		267		228		17			522		449		16

Income from continuing operations before income taxes		266		281		(5)			479		580		(17)
Income tax provision		95		100		(5)			171		206		(17)

Income from continuing operations, net of tax	$	171	$	181		(6)		$	308	$	374		(18)

Selected performance metrics:
Average loans held for investment⁽³⁾:
Commercial and multifamily real estate	$	21,484	$	18,084		19		$	21,224	$	17,771		19
Commercial and industrial		24,611		20,332		21			24,079		20,142		20

Total commercial lending		46,095		38,416		20			45,303		37,913		19
Small-ticket commercial real estate		896		1,096		(18)			914		1,134		(19)

Total commercial banking	$	46,991	$	39,512		19		$	46,217	$	39,047		18

Average yield on loans held for investment⁽²⁾		3.50%		3.84%		(34)	bps		3.48%		3.87%		(39)	bps
Average deposits	$	31,238	$	30,746		2	%	$	31,431	$	30,542		3	%
Average deposit interest rate		0.24%		0.26%		(2)	bps		0.24%		0.27%		(3)	bps
Core deposit intangible amortization	$	5	$	8		(38)	%	$	11	$	15		(27)	%
Net charge-offs		3		4		(25)			7		11		(36)
Net charge-off rate		0.03%		0.04%		(1)	bps		0.03%		0.06%		(3)	bps

(Dollars in millions)	June 30, 2014		December 31, 2013		Change
Selected period-end data:
Loans held for investment⁽³⁾:
Commercial and multifamily real estate	$	22,040	$	20,750		6	%
Commercial and industrial		25,402		23,309		9

Total commercial lending		47,442		44,059		8
Small-ticket commercial real estate		879		952		(8)

Total commercial banking	$	48,321	$	45,011		7

Nonperforming loans rate		0.38%		0.33%		5	bps
Nonperforming asset rate⁽⁴⁾		0.41		0.37		4
Allowance for loan and lease losses	$	368	$	338		9	%
Allowance coverage ratio⁽⁵⁾		0.76%		0.75%		1	bps
Deposits	$	31,440	$	30,567		3	%
Loans serviced for others		11,411		10,786		6

Change is not meaningful.

⁽¹⁾

In the first quarter of 2014, we adopted the proportional amortization method of accounting for Investments in Qualified Affordable Housing Projects. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior periods have been recast to conform to this presentation.

⁽²⁾

The average yield on loans held for investment is calculated by dividing annualized interest income for the period by average loans held for investment during the period. Some of our tax-related commercial investments generate tax-exempt income or tax credits. Accordingly, we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35%.


		28		Capital One Financial Corporation (COF)

⁽³⁾

Includes Acquired Loans with carrying value of $217 million and $262 million as of June 30, 2014 and December 31, 2013, respectively. The average balance of commercial banking loans held for investment, excluding Acquired Loans, was $46.8 billion and $39.2 billion in the second quarter of 2014 and 2013, respectively, and $46.0 billion and $38.7 billion in the first six months of 2014 and 2013, respectively.

⁽⁴⁾

Calculated by dividing nonperforming assets as of the end of the period by the sum of period-end loans held for investment, foreclosed properties, and other foreclosed assets.

⁽⁵⁾

Calculated by dividing the allowance for loan and lease losses as of the end of the period by period-end loans held for investment.

Key factors affecting the results of our Commercial Banking business for the second quarter and first six months of 2014, compared with the second quarter and first six months of 2013, and changes in financial condition and credit performance between June 30, 2014 and December 31, 2013 include the following:

•

Net Interest Income: Net interest income increased by $34 million, or 8%, in the second quarter of 2014 from the second quarter of 2013, to $436 million, and by $54 million, or 7%, in the first six months of 2014 from the first six months of 2013, to $857 million. The increase was driven by growth in commercial loans, partially offset by lower loan yields driven by market and competitive pressures.

•

Non-Interest Income: Non-interest income increased by $16 million, or 17%, in the second quarter of 2014 from the second quarter of 2013, to $109 million, and by $19 million, or 11%, in the first six months of 2014 from the first six months of 2013, to $196 million, primarily driven by increased revenue related to fee-based services and products and the Beech Street Capital acquisition.

•

Provision for Credit Losses: The provision for credit losses increased by $26 million in the second quarter of 2014 to $12 million from a benefit of $14 million in the second quarter of 2013, and by $101 million in the first six months of 2014 to $52 million from a benefit of $49 million in the first six months of 2013. The increase was primarily driven by growth in the portfolio. The increase in allowance for loan and lease losses and reserve for unfunded lending commitments was $9 million and $45 million in the second quarter and first six months of 2014, respectively, compared with a release of $20 million and $60 million in the second quarter and first six months of 2013, respectively.

•

Non-Interest Expense: Non-interest expense increased by $39 million, or 17%, in the second quarter of 2014 from the second quarter of 2013, to $267 million, and by $73 million, or 16%, in the first six months of 2014 from the first six months of 2013, to $522 million, driven by operating expenses associated with continued investments in business growth and the Beech Street Capital acquisition.

•

Loans Held for Investment: Period-end loans held for investment increased by $3.3 billion, or 7%, to $48.3 billion as of June 30, 2014 from $45.0 billion as of December 31, 2013. The increase was driven by loan growth in the commercial and industrial and commercial and multifamily real estate businesses.

•

Deposits: Period-end deposits increased by $873 million, or 3%, to $31.4 billion as of June 30, 2014, from $30.6 billion as of December 31, 2013, driven by our strategy to deepen and expand relationships with commercial customers.

•

Charge-off Statistics: The net charge-off rate was 0.03% in both the second quarter and first six months of 2014, compared to 0.04% and 0.06% in the second quarter and first six months of 2013, respectively. The nonperforming loans rate increased to 0.38% as of June 30, 2014, from 0.33% as of December 31, 2013. The continued strength in the credit metrics in our Commercial Banking business reflects stable credit trends and underlying collateral values.

Other Category

Other includes unallocated amounts related to our centralized Corporate Treasury group activities, such as management of our corporate investment portfolio and asset/liability management, gains and losses on our


		29		Capital One Financial Corporation (COF)

investment securities portfolio and certain trading activities. Other also includes foreign exchange-rate fluctuations related to the revaluation of foreign currency-denominated investments; certain gains and losses on the sale and securitization of loans; unallocated corporate expenses that do not directly support the operations of the business segments or for which the business segments are not considered financially accountable in evaluating their performance, such as certain acquisition and restructuring charges; a portion of the provision for representation and warranty losses related to continuing operations; certain material items that are non-recurring in nature; and offsets related to certain line-item reclassifications.

Net profit from continuing operations recorded in Other was $31 million and $20 million in the second quarter and first six months of 2014, respectively, compared with a net loss from continuing operations of $117 million and $245 million in the second quarter and first six months of 2013, respectively. The shift from a net loss to a net profit was primarily due to higher net interest income driven by higher interest rates, lower funding costs, the continued run-off of higher rate brokered deposits, as well as the absence of the one-time charge associated with our redemption of trust preferred securities in January 2013.

Table 10 summarizes the financial results of our Other category for the periods indicated.

Table 10: Other Results⁽¹⁾


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2014		2013		Change		2014		2013		Change
Selected income statement data:
Net interest expense⁽²⁾	$	(13)	$	(131)		(90)%	$	(42)	$	(270)		(84)%
Non-interest income		35		(29)		**		33		(134)		**

Total net revenue (loss)		22		(160)		**		(9)		(404)		(98)
Provision (benefit) for credit losses		—		(4)		**		(3)		(2)		50
Non-interest expense		55		61		(10)		76		93		(18)

Loss from continuing operations before income taxes		(33)		(217)		(85)		(82)		(495)		(83)
Income tax benefit		(64)		(100)		(36)		(102)		(250)		(59)

Profit (loss) from continuing operations, net of tax	$	31	$	(117)		**	$	20	$	(245)		**

Change is not meaningful.

⁽¹⁾

⁽²⁾

Some of our tax-related commercial investments generate tax-exempt income or tax credits, accordingly we make certain reclassifications within our Commercial Banking business results to present revenues and yields on a taxable-equivalent basis, with offsetting reclassifications within the Other category, calculated assuming an effective tax rate approximately equal to our federal statutory tax rate of 35%.


		30		Capital One Financial Corporation (COF)

CONSOLIDATED BALANCE SHEETS ANALYSIS

Total assets of $298.3 billion as of June 30, 2014, increased by $1.4 billion, from $296.9 billion, as of December 31, 2013. Total liabilities of $254.5 billion as of June 30, 2014, decreased by $799 million, from $255.3 billion as of December 31, 2013. Stockholders’ equity increased by $2.2 billion, to $43.8 billion as of June 30, 2014. The increase in stockholders’ equity was primarily attributable to our net income of $2.3 billion for the first six months of 2014.

Following is a discussion of material changes in the major components of our assets and liabilities during the first six months of 2014. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to ensure the adequacy of capital while managing our liquidity requirements for the Company and our customers and our market risk exposure in accordance with our risk appetite.

Investment Securities

Our investment portfolio consists primarily of the following: U.S. Treasury debt, U.S. Agency debt and corporate debt securities guaranteed by U.S. government agencies; Agency and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”); other asset-backed securities (“ABS”) and other investments. The carrying value of our investments in U.S. Treasury, Agency securities and other securities guaranteed by the U.S. government or agencies of the U.S. government represented 79% and 77% of our total investment securities portfolio as of June 30, 2014 and December 31, 2013, respectively.

Our investment portfolio includes securities available for sale and held to maturity. We classify securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity. We report securities available for sale on our consolidated balance sheets at fair value with unrealized gains and losses recorded, net of tax, as a component of accumulated other comprehensive income (“AOCI”). We report securities held to maturity on our consolidated balance sheets at carrying value. Carrying value generally equals amortized cost. For securities transferred from available for sale to held to maturity, carrying value also includes unrealized gains and losses recognized in AOCI at the date of transfer. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.

During the first six months of 2014, the fair value of our investment portfolio increased by $1.5 billion, or 3% from $61.0 billion as of December 31, 2013, to $62.5 billion as of June 30, 2014. This increase was primarily driven by lower interest rates.

We had gross unrealized gains of $965 million and gross unrealized losses of $299 million on available-for sale investment securities as of June 30, 2014, compared with gross unrealized gains of $799 million and gross unrealized losses of $631 million as of December 31, 2013. The decrease in gross unrealized losses in the first six months of 2014 was primarily driven by lower interest rates in the second quarter of 2014. Of the $299 million in gross unrealized losses as of June 30, 2014, $276 million was related to securities that had been in a loss position for more than 12 months.

Table 11 presents the amortized cost, carrying value and fair value for the major categories of our portfolio of investment securities as of June 30, 2014 and December 31, 2013.


		31		Capital One Financial Corporation (COF)

Table 11: Investment Securities


	June 30, 2014				December 31, 2013
(Dollars in millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available for sale
U.S. Treasury debt obligations	$	1,221	$	1,223	$	831	$	833
U.S. Agency debt obligations		1		1		1		1
Corporate debt securities guaranteed by U.S. government agencies		1,120		1,092		1,282		1,234
RMBS:
Agency		21,779		21,948		21,572		21,479
Non-agency		3,077		3,579		3,165		3,600

Total RMBS		24,856		25,527		24,737		25,079

CMBS:
Agency		4,041		4,012		4,262		4,198
Non-agency		1,803		1,808		1,854		1,808

Total CMBS		5,844		5,820		6,116		6,006

Other ABS⁽¹⁾		5,972		6,022		7,123		7,136
Other securities⁽²⁾		1,433		1,428		1,542		1,511

Total investment securities available for sale	$	40,447	$	41,113	$	41,632	$	41,800


(Dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Investment securities held to maturity
Agency RMBS	$	18,852	$	19,498	$	17,443	$	17,485
Agency CMBS		1,836		1,907		1,689		1,700

Total investment securities held to maturity	$	20,688	$	21,405	$	19,132	$	19,185

⁽¹⁾

ABS collateralized by credit card loans constituted approximately 65% of the other ABS portfolio as of both June 30, 2014, and December 31, 2013, respectively, and ABS collateralized by auto dealer floor plan inventory loans and leases constituted approximately 13% and 15% of the other ABS portfolio as of June 30, 2014, and December 31, 2013, respectively. Approximately 89% of the securities in our other asset-backed security portfolio were rated AAA or its equivalent as of June 30, 2014, compared with 87% as of December 31, 2013.

⁽²⁾

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the Community Reinvestment Act (“CRA”).

We provide information on OTTI recognized in earnings on our investment securities above under “Consolidated Results of Operations—Non-Interest Income.”

Credit Ratings

Our portfolio of investment securities continues to be concentrated in securities that generally have high credit ratings and low credit risk, such as securities issued and guaranteed by the U.S. Treasury and other government sponsored enterprises or agencies. Approximately 91% and 92% of our total investment securities portfolio was rated AA+ or its equivalent, or better as of June 30, 2014 and December 31, 2013, respectively, while approximately 6% and 5% was below investment grade as of June 30, 2014 and December 31, 2013, respectively. We categorize the credit ratings of our investment securities based on the lowest credit rating as issued by the following rating agencies: Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”).


		32		Capital One Financial Corporation (COF)

Table 12 provides information on the credit ratings of our non-agency RMBS, non-agency CMBS, other asset-backed securities and other securities in our portfolio as of June 30, 2014 and December 31, 2013.

Table 12: Non-Agency Investment Securities Credit Ratings


	June 30, 2014								December 31, 2013
(Dollars in millions)	Amortized Cost		AAA		Other Investment Grade		Below Investment Grade or Not Rated		Amortized Cost		AAA		Other Investment Grade		Below Investment Grade or Not Rated
Non-agency RMBS	$	3,077		—%		4%		96%	$	3,165		—%		4%		96%
Non-agency CMBS		1,803		96		—		4		1,854		99		1		—
Other asset-backed securities		5,972		89		10		1		7,123		87		12		1
Other securities⁽¹⁾		1,433		3		89		8		1,542		9		82		9

⁽¹⁾

Includes foreign government/agency bonds, covered bonds, corporate securities, municipal securities and equity investments primarily related to activities under the CRA.

For additional information on our investment securities, see “Note 3—Investment Securities.”

Loans Held for Investment

Total loans held for investment (“HFI”) consists of unrestricted loans and restricted loans held in our securitization trusts. Table 13 summarizes our portfolio of loans held for investment by business segment, net of the allowance for loan and lease losses, as of June 30, 2014 and December 31, 2013.

Table 13: Net Loans Held for Investment


	June 30, 2014						December 31, 2013
(Dollars in millions)	Loans		Allowance		Net Loans		Loans		Allowance		Net Loans
Credit Card.	$	79,018	$	2,858	$	76,160	$	81,305	$	3,214	$	78,091
Consumer Banking.		71,062		765		70,297		70,762		752		70,010
Commercial Banking		48,321		368		47,953		45,011		338		44,673
Other		127		7		120		121		11		110

Total	$	198,528	$	3,998	$	194,530	$	197,199	$	4,315	$	192,884

Period-end loans held for investment increased by $1.3 billion, or 1%, in the first six months of 2014. The increase was due to commercial and industrial and commercial and multifamily real estate loan growth in our Commercial Banking business, and continued strong auto loan originations outpacing the run-off of the acquired home loans portfolio in our Consumer Banking business. Overall, there was a decline in our credit card loan portfolio primarily due to seasonality in the first quarter, partially offset by loan growth in the second quarter in our Credit Card business.

We provide additional information on the composition of our loan portfolio and credit quality below in “Credit Risk Profile” and in “Note 4—Loans.”

Loans Held for Sale

Loans held for sale, which are carried at lower of cost or fair value, increased to $709 million as of June 30, 2014, from $218 million as of December 31, 2013. The increase was primarily driven by higher originations and timing of sales of loans.


		33		Capital One Financial Corporation (COF)

Customer Deposits

Our customer deposits represent our largest source of funding for our operations, providing a consistent source of low-cost funds. Total customer deposits increased by $1.4 billion to $205.9 billion as of June 30, 2014, from $204.5 billion as of December 31, 2013. The increase in deposits was driven by growth in our Consumer and Commercial Banking businesses, which reflected our focus on deepening deposit relationships with existing customers and our continued marketing strategy to attract new business. We provide information on the composition of our deposits, average outstanding balances, interest expense and yield below in “Liquidity Risk Profile.”

Securitized Debt Obligations

Securitization debt obligations decreased by $279 million during the first six months of 2014, to $10.0 billion as of June 30, 2014, from $10.3 billion as of December 31, 2013. The decrease was driven by maturities of $2.8 billion, partially offset by the issuances of $2.5 billion of credit card securitization debt during the first six months of 2014. We provide additional information on our borrowings below in “Liquidity Risk Profile.”

Other Debt

Other debt, which consists primarily of federal funds purchased and securities loaned or sold under agreements to repurchase, senior and subordinated notes and Federal Home Loan Banks (“FHLB”) advances, totaled $29.1 billion as of June 30, 2014, of which $10.5 billion represented short-term borrowings and $18.6 billion represented long-term debt. Other debt totaled $30.4 billion as of December 31, 2013, of which $16.2 billion represented short-term borrowings and $14.2 billion represented long-term debt.

The decrease in other debt of $1.3 billion in the first six months of 2014 was primarily attributable to net maturities of $5.9 billion of FHLB advances and the maturity of $1.4 billion unsecured senior notes, partially offset by the issuance of $4.8 billion of unsecured senior notes as well as a $1.1 billion increase in federal funds purchased and securities loaned or sold under agreements to repurchase. We provide additional information on our borrowings below in “Liquidity Risk Profile” and in “Note 8—Deposits and Borrowings.”

Potential Mortgage Representation and Warranty Liabilities

We acquired three subsidiaries that originated residential mortgage loans and sold these loans to various purchasers, including purchasers who created securitization trusts. These subsidiaries are Capital One Home Loans, LLC, which was acquired in February 2005; GreenPoint, which was acquired in December 2006 as part of the North Fork acquisition; and CCB, which was acquired in February 2009 and subsequently merged into CONA.

We have established representation and warranty reserves for losses associated with the mortgage loans sold by each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and non-litigation liabilities. These reserves are reported on our consolidated balance sheets as a component of other liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires the application of judgment. We evaluate these estimates on a quarterly basis. We build our representation and warranty reserves through the provision for mortgage representation and warranty losses, which we report on our consolidated statements of income as a component of non-interest income for loans originated and sold by CCB and Capital One Home Loans, LLC and as a component of discontinued operations for loans originated and sold by GreenPoint. In establishing the representation and warranty reserves, we consider a variety of factors depending on the category of purchaser. The aggregate reserves for all three subsidiaries totaled $1.0 billion as of June 30, 2014, compared with $1.2 billion as of December 31, 2013.


		34		Capital One Financial Corporation (COF)

The table below summarizes changes in our representation and warranty reserves in the second quarter and first six months of 2014 and 2013.

Table 14: Changes in Representation and Warranty Reserve


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2014		2013		2014		2013
Representation and warranty repurchase reserve, beginning of period⁽¹⁾	$	1,128	$	994	$	1,172	$	899
Provision (benefit) for mortgage representation and warranty losses:
Recorded in continuing operations		(29)		(4)		(15)		(14)
Recorded in discontinued operations		11		187		(36)		294

Total provision (benefit) for mortgage representation and warranty losses		(18)		183		(51)		280
Net realized losses		(98)		(21)		(109)		(23)

Representation and warranty repurchase reserve, end of period⁽¹⁾	$	1,012	$	1,156	$	1,012	$	1,156

⁽¹⁾

Reported on our consolidated balance sheets as a component of other liabilities.

As part of our business planning processes, we have considered various outcomes relating to the potential future representation and warranty liabilities of our subsidiaries that are possible but do not rise to the level of being both probable and reasonably estimable outcomes justifying an incremental accrual under applicable accounting standards. Our current best estimate of reasonably possible future losses from representation and warranty claims beyond what was in our reserve as of June 30, 2014, is approximately $2.5 billion, a decline from our estimate of $2.6 billion as of December 31, 2013.

We provide additional information related to the representation and warranty reserve, including factors that may impact the adequacy of the reserves and the ultimate amount of losses incurred by our subsidiaries, in “Note 14—Commitments, Contingencies, Guarantees, and Others.”

OFF-BALANCE SHEET ARRANGEMENTS AND VARIABLE INTEREST ENTITIES

In the ordinary course of business, we are involved in various types of arrangements with limited liability companies, partnerships or trusts that often involve special purpose entities and variable interest entities (“VIE”). Some of these arrangements are not recorded on our consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the arrangements, depending on the nature or structure of, and accounting required to be applied to, the arrangement. These arrangements may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets. Our involvement in these arrangements can take many forms, including securitization and servicing activities, the purchase or sale of mortgage-backed or other asset-backed securities in connection with our home loans portfolio and loans to VIEs that hold debt, equity, real estate or other assets.

Our continuing involvement in unconsolidated VIEs primarily consists of certain mortgage loan trusts and community reinvestment and development entities. The carrying amount of assets and liabilities of these unconsolidated VIEs was $3.4 billion and $464 million, respectively, as of June 30, 2014, and our maximum exposure to loss was $4.0 billion as of June 30, 2014. We provide a discussion of our activities related to these VIEs in “Note 6—Variable Interest Entities and Securitizations.”

CAPITAL MANAGEMENT

The level and composition of our equity capital are determined by multiple factors, including our consolidated regulatory capital requirements and internal risk-based capital assessments such as internal stress testing and


		35		Capital One Financial Corporation (COF)

economic capital. The level and composition of our capital may also be influenced by rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments.

Capital Standards and Prompt Corrective Action

Bank holding companies and national banks are subject to capital adequacy standards adopted by the Federal Reserve and the OCC, respectively. The capital adequacy standards set forth minimum risk-based and leverage capital requirements that are based on quantitative and qualitative measures of assets and off-balance sheet items. National banks, as insured depository institutions, are also subject to Prompt Corrective Action (“PCA”) capital regulations, which require the U.S. federal banking agencies to take “prompt corrective action” for banks that do not meet established minimum capital requirements.

In July 2013, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Issuance Corporation (“FDIC”) (collectively, the U.S. federal banking agencies) finalized a new capital rule (the “Final Rule”) that implements the Basel III capital accord developed by the Basel Committee on Banking Supervision (“Basel Committee”) and certain Dodd-Frank Act capital provisions and updates the PCA capital requirements. Prior to being revised in the Final Rule, the minimum risk-based capital requirements adopted by the U.S. federal banking agencies followed the Basel I framework, originally promulgated pursuant to the Basel Committee’s Basel I accord, and the advanced approaches capital rules (“Advanced Approaches”), based upon the framework originally promulgated as a result of the Basel II accord. The Final Rule amended both the Basel I and Advanced Approaches frameworks, establishing a new common equity Tier 1 capital requirement and setting higher minimum capital ratio requirements. The Company refers to the amended Basel I framework as the “Basel III Standardized Approach,” and the amended Advanced Approaches framework as the “Basel III Advanced Approaches.”

At the end of 2012, the Company met one of the two independent eligibility criteria set by banking regulators for becoming subject to the Advanced Approaches capital rules. As a result, the Company has undertaken a multi-year process of implementing the Advanced Approaches regime for calculating risk-weighted assets and regulatory capital levels. Certain provisions of the Final Rule began to take effect on January 1, 2014 for Advanced Approaches banking organizations, including the Company. The Company will be subject to a parallel run under Advanced Approaches, expected to begin January 1, 2015, during which it will calculate capital ratios under both the Basel III Standardized Approach and the Basel III Advanced Approaches, though it will continue to use the Basel III Standardized Approach for purposes of meeting regulatory capital requirements. By rule, the parallel run must last at least four consecutive quarters. Therefore, the first quarter of 2016 is the earliest possible date on which the Company would use the Basel III Advanced Approaches framework in calculating its regulatory capital and risk-weighted assets for purposes of risk-based capital requirements. Consistent with the experience of other U.S. banks, it is possible that our parallel run will last longer than the four quarter minimum. Under the Dodd-Frank Act and the Final Rule, organizations subject to Basel III Advanced Approaches may not hold less capital than would be required under the Basel III Standardized Approach. Therefore, even after we exit parallel run, we will continue to calculate regulatory capital and risk-weighted assets under the Basel III Standardized Approach.

As of January 1, 2014, the new minimum risk-based and leverage capital requirements for Advanced Approaches banking organizations include a common equity Tier 1 capital ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 5.5%, a total risk-based capital ratio of at least 8.0%, and a Tier 1 leverage capital ratio of at least 4.0%. On January 1, 2015, the minimum risk-based capital ratio requirements will increase to 4.5% for the common equity Tier 1 capital ratio and to 6.0% for the Tier 1 risk-based capital ratio. The minimum requirements for the total risk-based capital ratio and the Tier 1 leverage capital ratio will not change from 2014 to 2015.

Insured depository institutions also are subject to PCA capital regulations. Under current PCA regulations, an insured depository institution is considered to be well-capitalized if it maintains a Tier 1 risk-based capital ratio of at least 6.0%, a total risk-based capital ratio of at least 10.0%, a Tier 1 leverage capital ratio of at least 5.0%, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued


		36		Capital One Financial Corporation (COF)

by its regulator. While the Final Rule increases some of the thresholds for the PCA capital categories and adds the new common equity Tier 1 capital ratio to the PCA regulations, those changes are not effective until January 1, 2015. Beginning on January 1, 2015, the well-capitalized level for the Tier 1 risk-based capital ratio will increase to 8.0%, and the well-capitalized level for the common equity Tier 1 capital ratio will be established at 6.5%. The well-capitalized levels for the total risk-based capital ratio and the Tier 1 leverage capital ratio will not change.

Prior to 2014, we also disclosed a Tier 1 common capital ratio for our bank holding company, which is a regulatory capital measure widely used by investors, analysts, rating agencies and bank regulatory agencies to assess the capital position of financial services companies. There was no mandated minimum or well-capitalized standard for the Tier 1 common capital ratio.

We disclose a non-GAAP tangible common equity ratio (“TCE ratio”) in “MD&A—Summary of Selected Financial Data.” While the TCE ratio is a capital measure widely used by investors, analysts, rating agencies, and bank regulatory agencies to assess the capital position of financial services companies, it may not be comparable to similarly titled measures reported by other companies. We provide information on the calculation of this ratio in “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures.”

Table 15 provides a comparison of our regulatory capital ratios under the U.S. federal banking agencies’ capital adequacy standards as of June 30, 2014 and December 31, 2013. Under the Final Rule, beginning on January 1, 2014, as an Advanced Approaches banking organization that has yet to enter or exit parallel run, we began using the Basel III Standardized Approach for calculating our regulatory capital, subject to applicable transition provisions. In 2014, however, we will continue to use Basel I for calculating our risk-weighted assets in our regulatory capital ratios, as required under the Final Rule. Beginning on January 1, 2015, we will use the Basel III Standardized Approach for calculating our risk-weighted assets in our regulatory capital ratios.

Table 15: Capital Ratios⁽¹⁾⁽²⁾

June 30, 2014

December 31, 2013

Capital
Ratio

Minimum
Capital
Adequacy

Well-
Capitalized

Capital
Ratio

Minimum
Capital
Adequacy

Well-
Capitalized

Capital One Financial Corp:

Common equity Tier 1 capital⁽³⁾

12.72%

4.00%

N/A

N/A

Tier 1 common⁽⁴⁾

N/A

12.19%

N/A

Tier 1 risk-based capital⁽⁵⁾

13.31%

5.50%

6.00%

12.57

4.00%

6.00%

Total risk-based capital⁽⁶⁾

15.36

8.00

10.00

14.69

8.00

10.00

Tier 1 leverage⁽⁷⁾

10.70

4.00

N/A

10.06

4.00

N/A

Capital One Bank (USA), N.A.:

Common equity Tier 1 capital⁽³⁾

11.70%

4.00%

N/A

N/A

Tier 1 risk-based capital⁽⁵⁾

11.70

5.50

6.00%

11.47%

4.00%

6.00%

Total risk-based capital⁽⁶⁾

15.16

8.00

10.00

14.90

8.00

10.00

Tier 1 leverage⁽⁷⁾

10.11

4.00

5.00

10.21

4.00

5.00

Capital One, N.A.:

Common equity Tier 1 capital⁽³⁾

13.09%

4.00%

N/A

N/A

Tier 1 risk-based capital⁽⁵⁾

13.09

5.50

6.00%

12.67%

4.00%

6.00%

Total risk-based capital⁽⁶⁾

14.14

8.00

10.00

13.76

8.00

10.00

Tier 1 leverage⁽⁷⁾

9.42

4.00

5.00

8.96

4.00

5.00

⁽¹⁾


		37		Capital One Financial Corporation (COF)

⁽²⁾

Capital ratios are calculated based on the Basel I capital framework as of December 31, 2013 and are calculated based on the Basel III Standardized Approach framework, subject to applicable transition provisions, as of June 30, 2014. Capital ratios that are not applicable are denoted by “N/A.” See “MD&A—Supplemental Tables—Table A: Reconciliation of Non-GAAP Measures and Calculation of Regulatory Capital Measures” for additional information.

⁽³⁾

Common equity Tier 1 capital ratio is a regulatory capital measure under Basel III calculated based on common equity Tier 1 capital divided by risk-weighted assets.

⁽⁴⁾

Tier 1 common capital ratio is a regulatory capital measure under Basel I calculated based on Tier 1 common capital divided by Basel I risk-weighted assets.

⁽⁵⁾

Tier 1 risk-based capital ratio is a regulatory capital measure calculated based on Tier 1 capital divided by risk-weighted assets.

⁽⁶⁾

Total risk-based capital ratio is a regulatory capital measure calculated based on total risk-based capital divided by risk-weighted assets.

⁽⁷⁾

Tier 1 leverage ratio is a regulatory capital measure calculated based on Tier 1 capital divided by average assets, after certain adjustments.

Our common equity Tier 1 capital ratio, as calculated under the Basel III Standardized Approach, subject to transition provisions, was 12.72% as of June 30, 2014. Our Tier 1 common capital ratio, as calculated under Basel I, was 12.19% as of December 31, 2013. These numbers are not directly comparable due to methodological differences in the calculation of the ratios and the transition requirements under the Final Rule. For purposes of our capital plan, for which we received the Federal Reserve’s non-objection on March 26, 2014, we were assessed on our ability throughout the 2014 CCAR Cycle to maintain, among other measures, a Tier 1 common ratio of 5.0% on a pro forma basis under expected and stressful conditions. We estimate that our Tier 1 common ratio, as calculated under Basel I, was approximately 12.7% as of June 30, 2014. Capital One Financial Corporation exceeded U.S. federal banking agencies’ minimum capital requirements and the Banks exceeded minimum regulatory requirements and were “well-capitalized” under PCA requirements as of June 30, 2014 and December 31, 2013.

As described above, we are currently using the Basel III Standardized Approach for calculating our regulatory capital, subject to transition provisions. The Basel III Standardized Approach common equity Tier 1 capital requirement under the Final Rule includes additional adjustments and deductions not included in the Tier 1 common capital requirement calculated under Basel I, such as the inclusion of the unrealized gains and losses on available-for-sale investment securities included in AOCI and adjustments related to intangibles. These adjustments are phased-in at 20% for 2014, 40% for 2015, 60% for 2016, 80% for 2017 and at 100% for 2018. Also as described above, we will continue to use Basel I for calculating our risk-weighted assets in our risk-based regulatory capital ratios in 2014. However, beginning on January 1, 2015, we will use the Basel III Standardized Approach for calculating our risk-weighted assets in our risk-based regulatory capital ratios.

The following table compares our common equity Tier 1 capital and risk-weighted assets as of June 30, 2014, calculated based on the Final Rule, subject to applicable transition provisions, to our estimated common equity Tier 1 capital and risk-weighted assets as of June 30, 2014, calculated under the Basel III Standardized Approach, as it applies when fully phased-in. See the table and notes below for further discussion on our interpretations, expectations and assumptions used in calculating this ratio.


		38		Capital One Financial Corporation (COF)

Table 16: Estimated Common Equity Tier 1 Ratio under Fully Phased-In Basel III Standardized Approach


(Dollars in millions)
Common Equity Tier 1 Capital under Basel III Standardized as of June 30, 2014	$	28,774
Adjustments related to AOCI⁽¹⁾		(378)
Adjustments related to intangibles⁽¹⁾		(1,157)
Other adjustments⁽¹⁾		(1)

Estimated Common Equity Tier 1 Capital under Fully Phased-In Basel III Standardized	$	27,238

Risk-weighted assets under Basel I	$	226,172
Adjustments for Basel III Standardized⁽²⁾		8,017

Estimated risk-weighted assets under Basel III Standardized	$	234,189

Estimated Common Equity Tier 1 Capital Ratio under Fully Phased-In Basel III Standardized⁽³⁾		11.6%

⁽¹⁾

Assumes adjustments are fully phased-in.

⁽²⁾

Adjustments to the Basel I approach to calculating risk-weighted assets include higher risk weights for exposures 90 days or more past due or in nonaccrual, high volatility commercial real estate, securitization exposures and corresponding adjustments to PCCR intangibles, deferred tax assets and certain other assets in the calculation of common equity Tier 1 capital under the Basel III Standardized Approach.

⁽³⁾

Calculated by dividing estimated common equity Tier 1 capital under the fully phased-in Basel III Standardized Approach by estimated risk-weighted assets under the Basel III Standardized Approach.

Under the Final Rule, when we complete our parallel run for the Advanced Approaches, our minimum risk-based capital requirement will be the greater requirement of the Basel III Standardized Approach and the Basel III Advanced Approaches. See “Supervision and Regulation—Basel III and U.S. Capital Rules” in our 2013 Annual Report on Form 10-K for additional information. Based on our business mix, we anticipate that we will need to hold more regulatory capital under the Basel III Advanced Approaches than under Basel I or the Basel III Standardized Approach to meet our minimum required regulatory capital ratios.

Capital Planning and Regulatory Stress Testing

In November 2011, the Federal Reserve finalized capital planning rules applicable to large bank holding companies like us. Under these rules, bank holding companies with consolidated assets of $50 billion or more must submit capital plans to the Federal Reserve on an annual basis that contains a description of all planned capital actions, including dividends or stock repurchases, over a nine-quarter planning horizon beginning with the fourth quarter of the calendar year prior to the submission of the capital plan (“CCAR cycle”). The bank holding company may take the capital actions in its capital plan if the Federal Reserve provides a non-objection to the plan. The Federal Reserve’s objection or non-objection applies specifically to capital actions during the four quarters beginning with the second quarter of the second calendar year in the planning horizon. The purpose of the rules is to ensure that large bank holding companies have robust, forward-looking capital planning processes that account for their unique risks and capital needs to continue operations through times of economic and financial stress. On June 12, 2014, the Federal Reserve and OCC proposed changes to their regulations governing the CCAR and stress testing processes. For additional information on the Proposed Rules, see “MD&A—Supervision and Regulation.”

As a result of the Federal Reserve’s non-objection to our 2014 capital plan, we expect to maintain our quarterly dividend of $0.30 per share, subject to approval by our Board of Directors. In addition, our Board of Directors has authorized the repurchase of up to $2.5 billion of shares of common stock through the end of the first quarter of 2015.


		39		Capital One Financial Corporation (COF)

Equity Offerings and Transactions

On June 12, 2014, the Company issued and sold 20,000,000 depositary shares (“Depositary Shares”), each representing a 1/40th interest in a share of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, $0.01 par value, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series C Preferred Stock) (the “Series C Preferred Stock”). Dividends will accrue on the Series C Preferred Stock at a rate of 6.25% per annum, payable quarterly in arrears. The net proceeds of the offering of the 20,000,000 Depositary Shares were approximately $484 million, after deducting underwriting commissions and offering expenses. Under the terms of the Series C Preferred Stock, the ability of the Company to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series C Preferred Stock, is subject to restrictions in the event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series C Preferred Stock for the immediately preceding dividend period.

Dividend Policy and Stock Purchases

We paid common stock dividends of $0.30 per share in the second quarter of 2014. During the second quarter, we also paid preferred stock dividends of $15.00 per share on the outstanding shares of our 6.00% fixed rate non-cumulative perpetual preferred stock, Series B (the “Series B Preferred Stock”).

On July 31, 2014, our Board of Directors declared a quarterly dividend of $0.30 per share, payable August 21, 2014 and quarterly dividends on our Series B Preferred Stock and Series C Preferred Stock payable on September 2nd. Based on these declarations, the company will pay approximately $169 million in common equity dividends and approximately $20 million in total preferred dividends in Q3 2014.

The declaration and payment of dividends to our stockholders, as well as the amount thereof, are subject to the discretion of our Board of Directors and depend upon our results of operations, financial condition, capital levels, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. As a bank holding company, our ability to pay dividends is largely dependent upon the receipt of dividends or other payments from our subsidiaries. Regulatory restrictions exist that limit the ability of the Banks to transfer funds to our bank holding company. Funds available for dividend payments from COBNA and CONA were $1.3 billion and $210 million, respectively, as of June 30, 2014. There can be no assurance that we will declare and pay any dividends. For additional information on dividends, see “Part I-Item 1. Business—Supervision and Regulation—Dividends, Stock Purchases and Transfer of Funds” in our 2013 Form 10-K.

As disclosed in “Capital Planning and Regulatory Stress Testing” above, we plan to repurchase up to $2.5 billion of common stock within the CCAR 2014 cycle, through the 2014 Stock Repurchase Program approved by our Board of Directors. Through the end of the second quarter of 2014, we have repurchased approximately $1.0 billion of shares as a part of this program.

The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position and amount of retained earnings. Our share repurchase program does not include specific price targets, may be executed through open market purchases or privately negotiated transactions, including utilizing Rule 10b5-1 programs, and may be suspended at any time. For additional information on stock repurchases, see “Part I—Item 1. Business—Supervision and Regulation—Dividends, Stock Repurchases and Transfer of Funds” in our 2013 Form 10-K.

RISK MANAGEMENT

Overview

We use a risk framework to manage risk. We execute against our risk management framework with the “Three Lines of Defense” risk management model to demonstrate and structure the roles, responsibilities and


		40		Capital One Financial Corporation (COF)

accountabilities in the organization for taking and managing risk. The “First Line of Defense” is comprised of the business areas that through their day-to-day business activities take risk on our behalf. As the business owner, the first line is responsible for identifying, assessing, managing and controlling that risk, and for mitigating our overall risk exposure. The “Second Line of Defense” provides oversight of first line risk taking and management, and is comprised of our risk management organization and other staff control functions. The second line assists in determining risk capacity, risk appetite, and the strategies, policies and structure for managing risks. The second line is both an “expert advisor” to the first line and an “effective challenger” of first line risk activities. The “Third Line of Defense” is comprised of our internal audit and credit review functions. The third line provides independent and objective assurance to senior management and to the Board of Directors that first and second line risk management and internal control systems and its governance processes are well-designed and working as intended. Our risk framework, which is built around governance, processes and people, consists of the following eight key elements:

•

Establish governance processes, accountabilities, and risk appetites

•

Identify and assess risks and ownership

•

Develop and operate controls, monitoring and mitigation plans

•

Test and detect control gaps and perform corrective action

•

Escalate key risks and gaps to executive management, and when appropriate the Board of Directors

•

Calculate and allocate capital in alignment with risk management and measurement processes (including stress testing)

•

Support with the right culture, talent and skills

•

Enable with right data, infrastructure and programs

We provide additional discussion of our risk management principles, roles and responsibilities, framework and risk appetite under “MD&A—Risk Management” in our 2013 Form 10-K.

CREDIT RISK PROFILE

Our loan portfolio accounts for the substantial majority of our credit risk exposure. These activities are also governed under our credit policy and are subject to independent review and approval. Below we provide information about the composition of our loan portfolio, key concentrations and credit performance metrics.

We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of securities for our investment securities portfolio, entering into derivative transactions to manage our market risk exposure and to accommodate customers, foreign exchange transactions, and customer overdrafts. We provide additional information on credit risk related to our investment securities portfolio under “Consolidated Balance Sheets Analysis—Investment Securities” and credit risk related to derivative transactions in “Note 9—Derivative Instruments and Hedging Activities.”

Loan Portfolio Composition

We provide a variety of lending products. Our primary products include credit cards, auto loans, home loans and commercial loans. For information on our lending policies and procedures, including our underwriting criteria for our primary loan products, see “MD&A—Credit Risk Profile” in our 2013 Form 10-K.

Our total loan portfolio consists of loans held for investment, including restricted loans (underlying our consolidated securitization trusts), and loans held for sale. Table 17 presents the composition of our portfolio of loans held for investment, by portofilio segment, as of June 30, 2014 and December 31, 2013. Table 17 and the


		41		Capital One Financial Corporation (COF)

credit metrics presented in this section exclude loans held for sale, which are carried at lower of cost or fair value and totaled $709 million and $218 million as of June 30, 2014, and December 31, 2013, respectively.

Table 17: Loan Portfolio Composition


	June 30, 2014								December 31, 2013
(Dollars in millions)	Loans		Acquired Loans		Total		% of Total		Loans		Acquired Loans		Total		% of Total
Credit Card:
Domestic credit card⁽¹⁾	$	71,128	$	37	$	71,165		35.8%	$	73,192	$	63	$	73,255		37.1%
International credit card		7,853		—		7,853		4.0		8,050		—		8,050		4.1

Total credit card		78,981		37		79,018		39.8		81,242		63		81,305		41.2

Consumer Banking:
Auto		34,790		2		34,792		17.5		31,852		5		31,857		16.2
Home loan		6,930		25,714		32,644		16.5		7,098		28,184		35,282		17.9
Retail banking		3,577		49		3,626		1.8		3,587		36		3,623		1.8

Total consumer banking		45,297		25,765		71,062		35.8		42,537		28,225		70,762		35.9

Commercial Banking:⁽²⁾
Commercial and multifamily real estate		21,975		65		22,040		11.1		20,666		84		20,750		10.5
Commercial and industrial		25,250		152		25,402		12.8		23,131		178		23,309		11.8

Total commercial lending		47,225		217		47,442		23.9		43,797		262		44,059		22.3

Small-ticket commercial real estate		879		—		879		0.4		952		—		952		0.5

Total commercial banking		48,104		217		48,321		24.3		44,749		262		45,011		22.8

Other:
Other loans		127		—		127		0.1		121		—		121		0.1

Total loans held for investment	$	172,509	$	26,019	$	198,528		100.0%	$	168,649	$	28,550	$	197,199		100.0%

⁽¹⁾

Includes installment loans of $205 million and $323 million as of June 30, 2014 and December 31, 2013, respectively.

⁽²⁾

Includes construction loans and land development loans totaling $2.1 billion and $2.0 billion as of June 30, 2014 and December 31, 2013, respectively.

Credit Risk Measurement

We closely monitor economic conditions and loan performance trends to assess and manage our exposure to credit risk. Key metrics we track in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as charge-off rates and our internal risk ratings of larger balance commercial loans. Trends in delinquency rates are a primary indicator of credit risk within our consumer loan portfolios, as changes in delinquency rates provide an early warning of changes in credit losses. The primary indicator of credit risk in our commercial loan portfolios is risk ratings. Because we generally classify loans that have been delinquent for an extended period of time and other loans with significant risk of loss as nonperforming, the level of nonperforming assets represents another indicator of the potential for future credit losses. In addition to delinquency rates, the geographic distribution of our loans provides insight as to the credit quality of the portfolio based on regional economic conditions.

We use borrower credit scores in underwriting for most consumer loans. We do not use credit scores as a primary indicator of credit quality because product differences, loan structure and other factors drive large differences in credit quality for a given credit score. We continuously adjust our management of credit lines and collection strategies based on customer behavior and risk profile changes. Based on our most recent data, we estimate that approximately one-third of our Domestic Card portfolio had credit scores equal to or below 660 or no score, based on loan balances as of June 30, 2014, consistent with the proportion of the Domestic Card portfolio with credit scores equal to or below 660 or no score as of December 31, 2013.


		42		Capital One Financial Corporation (COF)

We present information in the section below on the credit performance of our loan portfolio, including the key metrics we use in tracking changes in the credit quality of our loan portfolio. We also present adjusted credit quality metrics excluding impact from Acquired Loans.

See “Note 4—Loans” in this Report for additional credit quality information. See “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K for information on our accounting policies for delinquent, nonperforming loans, charge-offs and troubled debt restructurings (“TDRs”) for each of our loan categories.

Delinquency Rates

We consider the entire balance of an account to be delinquent if the minimum required payment is not received by the first statement cycle date equal to or following the due date specified on the customer’s billing statement. Our 30+ day delinquency metrics include all loans held for investment that are 30 or more days past due, whereas our 30+ day performing delinquency metrics include loans that are 30 or more days past due but currently classified as performing and accruing interest. The 30+ day delinquency and 30+ day performing delinquency metrics are generally the same for credit card loans, as we continue to classify the substantial majority of credit card loans as performing until the account is charged-off, typically when the account is 180 days past due. See “Note 1—Summary of Significant Accounting Policies” in our 2013 Form 10-K for information on our policies for classifying loans as nonperforming for each of our loan categories.

Table 18 presents our 30+ day performing and total 30+ day delinquency rates, by portfolio segment, as of June 30, 2014 and December 31, 2013. It also presents the adjusted rates, which exclude Acquired Loans from the denominator as they are accounted for based on cash flows expected to be collected over the life of the loans.


		43		Capital One Financial Corporation (COF)

Table 18: 30+ Day Delinquencies


	June 30, 2014												December 31, 2013
	30+ Day Performing						30+ Day Total						30+ Day Performing						30+ Day Total
(Dollars in millions)	Amount		Rate⁽¹⁾		Adjusted Rate⁽²⁾		Amount		Rate⁽¹⁾		Adjusted Rate⁽²⁾		Amount		Rate⁽¹⁾		Adjusted Rate⁽²⁾		Amount		Rate⁽¹⁾		Adjusted Rate⁽²⁾
Credit Card:
Domestic credit card	$	2,013		2.83%		2.83%	$	2,013		2.83%		2.83%	$	2,514		3.43%		3.43%	$	2,514		3.43%		3.43%
International credit card		267		3.40		3.40		330		4.20		4.20		299		3.71		3.71		367		4.56		4.56

Total credit card		2,280		2.89		2.89		2,343		2.97		2.97		2,813		3.46		3.46		2,881		3.54		3.55

Consumer Banking:
Auto		2,006		5.77		5.77		2,156		6.20		6.20		2,181		6.85		6.85		2,375		7.46		7.46
Home loan		42		0.13		0.61		287		0.88		4.14		55		0.16		0.78		323		0.91		4.55
Retail banking		17		0.48		0.48		36		0.98		1.00		25		0.69		0.70		52		1.44		1.46

Total consumer banking		2,065		2.91		4.56		2,479		3.49		5.47		2,261		3.20		5.32		2,750		3.89		6.47

Commercial Banking:
Commercial and multifamily real estate		61		0.27		0.27		95		0.43		0.43		29		0.14		0.14		64		0.31		0.31
Commercial and industrial		36		0.14		0.14		82		0.32		0.32		73		0.31		0.32		108		0.46		0.47

Total commercial lending		97		0.20		0.20		177		0.37		0.38		102		0.23		0.23		172		0.39		0.39

Small-ticket commercial real estate		1		0.15		0.15		12		1.30		1.30		8		0.79		0.79		11		1.17		1.17

Total commercial banking		98		0.20		0.20		189		0.39		0.39		110		0.24		0.25		183		0.41		0.41

Other:
Other loans		4		2.91		2.91		16		12.43		12.43		4		3.32		3.32		19		15.72		15.72

Total	$	4,447		2.24		2.58	$	5,027		2.53		2.91	$	5,188		2.63		3.08	$	5,833		2.96		3.46